Schultz’s Transformation of Traditional Agriculture

Theodore William Schultz was the Nobel Prize laureate economist. He has published his
comprehensive book entitled Transformation of Traditional Agriculture, where he has analyzed
many characteristics of developing or least developed countries highlighting that those countries
were poor with practicing their traditional methods of agriculture since the time. He highlighted
that the traditional agriculture practice had been transferring from generation that led main causes
of low productivity led to low income, low saving and low investment ultimately. This evidence is
still find in low income countries in recent days. Consequently farmer cannot make save much and
not capital goods in further time. It indicates that farmer in the low income countries have no
reproduction capacity as sensed by Shultz.

“… The traditional agriculture is niggardly; this niggardliness is not a function of unique set
of preferences related to work and thrift; therefore farmer cannot save more nor produce capital
goods. But the transformation of such traditional agriculture may also way of growth by providing
skill and knowledge with incentive and reward to farmer in input and skill training especially
education is the major theme of the theory”.

The main gist of this theory is that man who is bounded in the traditional agriculture practice
cannot produce more food no matter how much land he have. Without skill and knowledge with
scientific technology providing to the farmer, thrift and work are not enough to overcome the large
quantity of farm product. Farmer cannot command to increase production even though they have
access knowledge. The knowledge with incentives and rewards that makes possible to transform a
farm capital, which entails investment. This investment is required not only in use of material
inputs, but importantly also investment in farm people training.

For the support of this hypothesis, Prof. Schultz had showed the example of Guatemala and India
on his empirical study. He showed a village of Guatemala which tends to characterized as capitalist
market. The market was perfectly competitive and all factors at the disposal of the community
were shown as fully used. There were no significant indivisibilities in methods of production, none
in the factors and none in production. There was no disguised unemployment, nor unemployment.
Similarly, in a village of India, he showed that there was remarkable close correspondence between
the various price estimates. It was found that the average allocation made on sample farms were
efficient within the context of the prevailing technical relationships. Again he was able to show that
there was no evidence that an improvement in economic output could be obtained by altering the
existing allocation as village relies on traditional resources and technology.

On the support of this description, he rejected following principle and concepts.

▪ Malthusian theory of population

▪ Diminishing returns in agriculture
▪ Disguised unemployment in agriculture

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 ▪ Zero marginal productivity (it was false doctrine, it was suspect, it was theoretical
presumptions)
▪ Factors indivisibilities

Attributes (Quality) of Traditional Agriculture: Schultz has not given much more emphasis on
traditional attributes of agriculture as in below-
• Subsistence occupation.
• Dependent on traditional technique and resources.
• Dependent on monsoon.
• Employment source for the majority of rural people.
• Low investment.
• Low productivity/zero marginal productivity.
• Integral part of traditional culture.
• Producer not willing to adopt changes.
• Inefficient allocation of resources.

He simply believes that traditional agriculture relaying on thrift and work. So that this traditional
agriculture can be transform into a relative economic growth. But growth can be achieved in long
run by adapting new factors of production. On the other hand, rural people think agricultural
productivity can be increased only by more working. On the basis of thrift and hard working habit of
farm people, Schultz claims that there is comparatively inefficiency in the allocation of factors of
production in traditional agriculture. In fact, poverty of such community is not a consequence of
any inefficiency in allocation of factors of production, but by an old technique of production.

Traditional Agriculture as a Source of Economic Growth

Prof. Schultz argued that traditional agriculture as a source of economic growth which depend
upon two notion as-
a. By using commanding political power to administer farm activities.
b. By providing economic incentives to make production decision and reward to allocate
resources efficiently in the market.
In about to allocate resources efficiently in the market, Schultz has suggested that people
transformed from traditional agriculture by learning how to use a new factor of production. It
sensed as a revolution in the traditional agriculture is required to increase agricultural productivity.
It implies that technological changes must be made easy available and acceptable to the traditional
farmer.
Again Schultz has stressed on the transformation of traditional agriculture to a modern sector by
passing through three phases of disequilibrium as given in the below.
1. Traditional Stage
This is an initial stage of agriculture sector, where the arts, preferences and motives remains
fixed over a long period of time. The supply and demand of factors arrived at long run equilibrium.
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The chief characteristics of these types are high price of sources of permanent income streams
from agricultural production. This indicates the feudal commanding power that use in decision of
agricultural production leads to a low economic efficiency in the allocation of resources.
2. Transitional Stage
This come next which exist between both the traditional and Modern stages. It is known as the
period of economic disequilibrium. It leads to bring inequalities in both the prices of agricultural
productivity and factors of production when it acquires a supply of one or more profitability factor
arise. In such stage the demand and supply of factors remain unequal.
3. Modern Stage
Generally this comes in the last stage, where farmer employs modern agricultural factors of
production. In this stage, efforts are made to discover and developed new factors of production
which contributed to raise the agricultural productivity. With an empirical evidence, preference and
motive of permanent income are not arrived long run equilibrium and sources of agriculture price
are not much high as found in many countries as in traditional stages. This implying that both the
political commanding power in decision of agricultural production and economic efficiency
significantly high in modern stage.

Diagrammatic Presentation of Schultz's Hypothesis

In upper figure we measure price of factors (inputs) along Y-axis (vertical) and demand and supply
of factor along X-axis (horizontal). Similarly, in lower we measure the rate of return on Y-axis and
factor combination along X-axis. The point Im lies in the upper figure represents equilibrium in the
traditional agriculture where prices of factors is very high at Po, consequently demand for and
supply of factors are very lower lies at Xo. Consequently the total quantities of factor combination
as well as return to factor inputs become low at Ro lies in lower figure. When new and cheap
sources of income streams are developed in an agricultural sector the demand and supply of factor
inputs tends to rise and return also increases as shown in figure below.
Figure.

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 Let price of factor input is low at OP1, as a result, the demand and supply of factor increases to
OX1, then new equilibrium is set at Hm where demand supply of inputs are interact each other. The
return would also increases from OR0 to OR1. Now the line joining from Im to Hm can be called
transitional phase. It is noted that the shape of demand and supply curve are less elastic in
traditional agriculture and more elastic in modern agriculture sector. It means in traditional
agriculture, a very high change in the price is required to bring about change in the demand and
supply of inputs in modern agriculture. However, even a small shift in the prices of factor input in
modern agriculture may bring about a great change in the demand and supply of factor inputs.
In brief the transformation of traditional agriculture into modern is depending on the facts given
below.
1. The role of farm size- control of economic decision and incentives to the farmers for efficient
farming are case of transforming traditional agriculture.
2. Technological changes and productive investment.
3. Investment in human capital- education is the best form of investment in human capital.
Conclusion
Schultz has successfully outlined the strategy of transforming traditional agriculture in simple
theoretical methods: that is the concept of demand and supply in the source of income stream. He
has able to show his empirical analysis of a village of Guatemala and a village of India for the
conclusion. It means when farmer's farms traditionally, they cannot produce much even if their
land size is high. On the other hand Schultz disagrees with the traditional method of agriculture. But
they require overcoming by possessing farmers to modern skill, knowledge and training into
existing farm people. Education and research will save money needed in economic development,
but both are time consuming. Farmers can produce more food even the land is poor. In his words,
"Once there are investment opportunities and efficient incentives, farmer will turn sand into
gold". According to him difference in land is not reason for low productivity. Similarly, different in
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material capital is less important than different in productive capacity of farm people. So that
education to farm people by providing improves seeds are the main strategy of transforming
traditional agriculture into modern development stage like Japan.
Critical Evaluation of Schultz’s Theory:
Even though the abundance of land resources exists in UDCs, agricultural productivity is low due
to fewer incentives to farmer and unorganized in character. A heavy investment with knowledge,
skill, incentive to farmer and technological implication on traditional agriculture which is practice in
UDCs can be transform economic growth by modernizing traditional practice. But economic
development of UDCs cannot solely depend upon the modernizing in agriculture but also depend
on other social value, institution and cultural practice which are routed in such countries. Thus
Schultz,s transformation of traditional agriculture theory has been criticized under following points.
1. General Concept: The theory is general concept applicable in specific situation. He gave
unique importance on economic characteristics of traditional agriculture while cultural
attributes are more or less has been ignored. In facts cultural attributes are required for
transformation process. Further more risk and uncertainty are equally significant which
farmers are facing in production. Again there is a problem of disequilibrium unemployment
which should study at macro level. Farmer’s are scattered which is causes of low productivity
and incentives.
2. Inefficiency of Factor Allocation: Schultz talks about efficient allocation of factor of
production in traditional agriculture but in fact factor allocations are not efficient in all case in
traditional agriculture. And are not also motivated by rational consideration.
3. Responsiveness of Farmer: Hypothesis regarding the responsiveness of the farmers to give
economic incentives has not evaluated at macro-level in traditional agriculture. This view
point is not supported by any sort of evidence.
4. Prevalence of disguised unemployment
5. Command approach
6. Self-contradictory: In his whole analysis he stressed on transformation process emerging
from traditional agriculture to modern agriculture. But he fails to analysis scientific in nature.
He has only stressed on production and development process in his model (Lekhi & Singh,
2014).

Implications in context of Nepal

Traditional attributes of Agriculture
Allocative efficiency: all factors of production are allocated with full regard to marginal returns and
marginal cost.
Zero marginal productivity of Labours
Higher Return in Traditional Agriculture i.e. price of agricultural input is high in traditional
agriculture. That is expensive sources of income streams in traditional agriculture.
Absentee decision in farm is discarded

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Discussion Demonstration
Reference
Lekhi, R. K. & Singh, J. (2014). The economics of development and planning. New Delhi: kalyani
Publishing House (pp. 100/III- 109/III).