Rational Expectations in American Agriculture, 1867-1914

DESPITE the historical importance of the Populist uprising in the late nineteenth century, the causes of the agrarian unrest which culminated in that movement remain obscure. Economic historians have become increasingly dubious of the justifications advanced by the Populists themselves, partly because many of the Populist programs (such as the Free Silver plan) were little more than schemes for an involuntary redistribution of wealth in favor of the farmers, and partly because many of the farmers' stated grievances fail to appear in the aggregate economic statistics of the period (Bowman, 1965; DeCanio, 1974a; Bowman and Keehn, 1974; North, 1974). The most comprehensive recent study concludes that "the agrarian protest of the late nineteenth century was not a simple, straightforward consequence of economic factors as many economic historians have believed" (Klepper, 1974, p. 285). There is some evidence that cyclical economic fluctuations coincided with upsurges of protest (Bowman and Keehn 1974; Klepper 1974), but the agrarian spokesmen of the time (as well as subsequent historians) attempted to identify long-standing structural problems of the agricultural sector as the ultimate explanation of the farmers' distress. One recurring theme in historical explanations of the agrarian unrest locates the source of the farmers' difficulties in their perceptions of and responses to the economic requirements of the market. Thus, Mayhew suggests that the protests of the Grangers and Alliancemen were a reaction to the commercialization of agriculture. This commercialization may have increased farm incomes, but it also made the farmers subject to impersonal market forces (Mayhew, 1972). Farmers' failure to understand the operation of the markets for their products is featured in textbook accounts of the Populist period (Davis, Hughes, and McDougall, 1969, p. 368; Gray and Peterson, 1974, p. 320; and North, 1974, p. 134). Econometric studies of the price-responsiveness of late nineteenth and early twentieth century American agriculture have shown that the sector as a whole responded properly to market prices in both the choice of crop mix and the choice of technique (Nerlove, 1958; Fisher and Temin, 1970; Hayami and Ruttan, 1971; DeCanio, 1973). These investigations of farmers' responses to output and input prices, however, do not indicate whether the estimated agricultural response parameters were in any sense optimal, nor can their fixed-parameter estimation techniques reveal whether the farmers' behavior changed in an appropriate manner as underlying market conditions changed. This paper goes beyond the previous studies by testing directly a rational expectations hypothesis for American agriculture during the Populist period. Using a varying-parameter estimation methodl it is possible to trace changes in the supply response parameters over time, and to compare those parameter variations with the variations implied by a model of rational price expectations. We will show that changes in the farmers' price expectations were indeed consistent with the theory of rational expectations. Since our estimates are based on the same statewide aggregate data used in the previous supply response studies, it is not possible to conclude from our results that all farmers formed rational expectations, but the existence of rational expectations in the aggregate leads us to reject the notion that farmers as a group were unable to Received for publication October 10, 1975. Revision accepted for publication March 15, 1976. ' The helpful comments of Paul David, Stanley Engerman, Jacob Metzer, Joel Mokyr, Marc Nerlove, William Parker, Merton Peck, Edward Prescott, Joe D. Reid, Jr., Peter Temin, and participants in seminars at the University of Pennsylvania and Columbia University are gratefully acknowledged. Responsibility for errors remains ours. The research was supported in part by NSF Grant GJ-l 154X3 to the National Bureau of Economic Research, and by NSF Grant SOC75-08056. I Recent developments in the theory of models with varying parameters are discussed in Cooley (1971) Rosenberg (1973) and Cooley and Prescott (1973a, 1973b, 1973c, and 1976).