Today's Economics Lesson-Why Agriculture is Only Done By Big Corporations With Any Success

Today's lesson is a two-fold lesson encompassing the concepts of economies of scale and the perfectly competitive firm structure. The first concept, economies of scale refers to the ability for larger firms to squeeze out additional units at lower and lower costs as they expand to the greatest marginal return. In other words, since fixed costs are highest at the first unit of output, the additional units spread out these costs over more and more units. This results in lower average cost per unit until diminishing returns set in. Diminishing returns means that for each unit past the minimum average cost level, the increase in marginal cost is greater than the benefit or revenue of the next unit.

For agriculture the fixed costs are quite high because land is thousands of dollars and acre, and the inputs for production such as tractors, feed, corrals, etc. are very expensive. As a result, the smaller farmer has to pay for the capital cost of their operation over a smaller number of units, so their average cost is higher than a corporate farm where the equipment and land costs are spread out of a factor of the smaller guy's operation. In other words, if farmer Joe and farmer Jim both raise cows in the same area, but farmer Joe has only ten acres and farmer Jim as a thousand, then farmer Jim has the ability(if his money allows) to purchase more cows than Joe possibly could, so the cost of the truck, trailer, feed will be spread out over however many units each one's land can produce efficiently.

A second consideration is the type of market structure an agricultural business exisists within. Since product differentiation between most agricultural products is pretty much nonexistent(ie one cannot tell apart milk from Joe's cows compared to milk from Jim's cows) and anyone who can buy land and cows can enter the market, and also that millions of little producers are creating milk at any given time result in a nearly perfectly competitive market. This has two important meanings economically: 1) that the homogenous nature of the product and number of sellers means nobody has the ability to control price or collude, and 2) that in the long run the economic profit is zero because firms can easily enter or exit the market depending on supply and demand conditions. As a result, the spot price for an agricultural good is the price anyone pays for it, so anything above that price will not sell at all. This creates a problem because the producers are reliant on say milk pricing being X, but then they fall and suddenly the smaller firm has the same costs but shrinking revenue. If the price rises, the smaller firm may be able to have a short term profit, but the price will go lower due to new firms producing the formerly profitable good.

Given how economically despairing the idea of being a small farmer is, so many people in this country still attempt it. The downfall of the family farm is an unfortunate side effect of the economic realization of the preceding lesson, in that the wages earned being a small farmer are more work and lower than what could be earned at a service job. If this were not the case, why would whole swathes of the nation see their children flee and towns become vacant as the last generations of farmer pass on?

This too shall pass

The image above is the left wing irony equivalent of the famous picture of Americans standing in a breadline in front of a billboard proclaiming the world's highest standard of living . Here a Venezuelan man picks through garbage to get food and items to salvage under a graffiti dedicated to a Marxist revolutionary. Both images portray the flaw in latching on to ideology, as ideologies are simply means to have power over people.

The previous statement is simply a reflection on the self interested nature of humanity. If that were not the case, then humans would be able to come together to rationally distribute resources for the sake of harmony. Instead, in any system of government there arise a class of rulers and a class of the ruled. The ruling class hordes the wealth of a nation that is produced by the ruled class' labor. This occurs in every system because there is a cartel problem in that the benefit to cheating is too great for such an order to continue. In other words, in a system where all the resources are evenly distributed among every member, there is a gigantic incentive to cheat because the small margin of excess over the next guy gives you political and economic power greater than the next guy since you can use the excess wealth to curry influence. It's the same reason why Goldman Sachs can steal $700 Billion from the treasury and Chavistas live in mansions. It's the same human failing with twin masks.

Writer's Block Edition

Since I am unable to write much due to my final classes and a big final project for school, I will put a picture to show what I am thinking.

The Best Deficits Fiat Money Can Buy

Today's story comes from CNBC about the cost of the financial socialism, I meant bailouts, exceeding the cost of WWII with inflation adjustment. So we are spending more money than it took to bring down both the Third Reich and the Empire of the Sun and all we have to show for it are executive compensations that only Croesus could imagine?

This is the largest transfer of wealth in human history, one which is mortgaging the future of the nation in the hands of the same idiots who got us into this place. Why nobody calls this the theft that it is comes as the biggest indictment of the modern media. In eight years Bush has increased the national debt from $5.272 trillion to $10.578 trillion. Check here if you want to see for yourself. The date range is from January 20, 2001 to today. Where is the outrage?

Thought from a trip to the grocery store

I have been employed in a precarious industry, so going to the grocery store meant looking for non perishable staples such as rice, pastas, sardines, etc. Well I went and noticed that every one of these things had high traffic in their areas. Sardines were almost all gone when I had taken my share, the pasta aisle was thinned, and basic goods seemed to be the majority of everyone's carts.

What does it mean? It means that, like me, most people are having to adjust to having less purchasing power and uncertainty about employment. Why would people spend extra money on groceries that will go bad in a few days if they are worried about their next paycheck? If you want to read it from CNBC instead of me, check here. I am a big believer in the most obvious things being the best economic indicators. When you see that parking lots are empty and people are buying only staple goods, things are bad no matter what the government statistics tell you.

Peter Schiff Says The Truth in 2006

Watch someone state the obvious and get ridiculed by trickle down cultist Art Laffer. It is so sad to see a washed up economist like Art Laffer talk about how great the US economy is while debt is shooting up faster than a junkie lottery winner.

This artificially low interest is the best point of the whole video. Since the mortgages were largely adjustable, the rise in interest rates that occurs when money get tightly squeezed makes homeowners unable to repay mortgages as they maxed out thinking the ARM was set in stone. Instead, the money has dried up and retail is falling as a result.

Wealth is illusory in the modern context because the asset valuation is not based on any kind of reasonable trade standard, IE a house is worth this much because that is the stable price for a house in the area, but instead it is being set by third parties such as appraisers and rating agencies. The worst part comes from the conflict of interest that the same ratings agents get money from the firms they rate. It is like believing a fake watch it really a Rolex because the dealer says it is such. Why would a shady person at a bus stop be any less reputable doing this con game than a white collar thief on Wal Street?

Poverty in America

Here are some pictures from the city showing poverty in the US.

Circuit City Falls, Who's Next?

Today's announcement that Circuit City is filing the Chapter 11 comes just days after retail sales have had their worst month in years. What does it mean to you? It means that people are not buying the gadgets they used to between losing their jobs or having bills take up larger and larger shares of their income. This Christmas will be a very bad one for retailers, with people paring back because they do not know if they will be employed in January. We should be seeing more Circuir Cities when the retail numbers from Christmas come in.

My political orientation

Does this seem right?

By the way, the axes are economics on the X and social on the Y.

The Ghost of Christmas Shopping Past

One of the more interesting developments to see whether the economy has bottomed out will be the retail numbers after Christmas. Since the November and December months are the two most profitable months in retail, the performance by retailers will signal whether money is being hoarded or spent. According to the latest retail data, same store sales are falling throughout the industry. Only Wal Mart currently seems to be above the fray.

The question remains, will Americans go through credit cards and pay 30% interest on the newest toys and gimmicks? At some point the shopping spree has to end, as wages are not rising as fast as inflation yet Americans are trying to stay at the same level of consumption. These two things cannot be kept going in the long run, as the end result is greater and greater debt.

More posts upcoming

I have been swamped lately, but I promise new posts soon.

Pre Election Predictions

As you can see, I don't give McCain much a chance. I see a lot of razor thin races in Virginia, Florida, and North Carolina which will go to Obama due to anger over the state of the economy. Texas will go to McCain by less than ten points. California will pass Prop 8(gay marriage ban) by a narrow margin of 52-48. Finally, I predict that Al Franken will lose in Minnesota once people realize who they are voting for.