CAIRNS ON INEFFICIENCY - A REJOINDER ROFESSOR Cairns, in a note published in this Journal,* con- P tends that the C.A.E.S. Workshop on farm and non-farm

income comparisons failed to spell out in sufficient detail “certain points” basic to the comparison.* He is particularly concerned about the inconclusive treatment given to the relationship between low incomes in agriculture and inefficiency. This he discusses by raising two questions (1) To what extent do low incomes indicate inefficiency? and (2) Should efficiency necessarily be the basis upon which rewards are distributed? I am dealing here primarily with his treatment of the first of these two questions.

His purpose in raising the issue of the relationship between inefficiency and low incomes is t o plead for an application of the term “efficiency” (or inefficiency) to inter-industry comparisons. Such an application would, in his judgment, lead to more a p propriate programs for agriculture.

Before attacking this position let me recognize two clearly defined and correct uses of the efficiency concept. First, in the field of physics, input-output ratios have a most respectable place. Second, in economic analyses of firms, optimum resource allocation has a clearly defined meaning. In these two areas scien- tists know what efficiency means. However, extension of the concept to cover inter-industry comparisons is quite another matter.

Cairns states that inefficiency may exist “even if each pro- ducing unit is operating with its available resources at optimum efficiency and with an adequate supply of all the productive.fac- tors.” (italics mine) This he says is the result of too many resources in a given industry.

His insistence that i t is necessary t o “refer to this type of situation as indicating inefficiency” must be challenged. Such a challenge should be based, perhaps, on an extensive review of the development of the efficiency concept but I must confine myself to a less thorough treatment here. Fortunately Mr. Cairns has provided an effective basis for argument in his suggested remedies fo r low incomes in agriculture. These proposals constitute his proof that the broader application of the term is useful.

1 Cairns “Low Incomes Inefficiency and Fairness” C.J.A.E. Vol. N. No. 2. 1966. 2 The Canadian ApricJltural Economics Society haa published the proceedings of thu

workshop held at Guelph. June 18-22. 1966, under the title The Cornparimon of Agricultural and Non-Agricultural Incomes.

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The first remedy is that of lowering money costs of inputs. This must refer to the non-farm sectors of the economy since he is discussing an agricultural industry whose firms are at optimum efficiency with an adequate supply of all factors of productoin. If input costs can be lowered the inefficiency lies elsewhere.

The second proposal involves an increase in demand and hence in price received for farm products. The interesting aspect of this proposal is that it must admit of other means of raising prices. Suppose for example that producer marketing boards succeeded in restricting supplies so effectively that prices of say, hogs, rose 300 per cent. Surely one cannot contend tha t Cairns’ concept of efficiency is valid when it requires that, under these conditions, hog producers have become more efficient. I have referred to one commodity only but marketing boards could conceivably control all agricultural production for price-raising purposes.

It is only his third remedy - that of withdrawal of resources from the industry where they are surplus - that follows logically from his thesis. Even here however, all depends upon the success with which one defines “surplus” and “inefficiency”.

Cairns has avoided a definition of efficiency. Perhaps he feels that there is general agreement on the meaning of this term. I would agree to this provided we confine our analysis to individual firms or firms of very similar characteristics. However, the problem takes on very different proportions when the analysis is extended to a so-called industry such as agriculture and it becomes unmanageable when applied to comparisons between industries.

Economists have wrestled with this problem for a good many years. John R. Commons, after reviewing economic doctrine on this point, observed that it is necessary to distinguish between input-output in physical terms and income-outgo in proprietary terms. He saw the utility of efficiency calculations in the man- agement of private firms but insisted tha t the use of the term “efficiency” led to social fallaciesu The workshop participants sought to avoid these fallacies.

Canada Department of Agriculture BALDUR H. KRISTJANSON

S J. R. Commons The Economiu of Colleetivo Action. The Macmilhn Company, Toronto, 1960. 0. 869