Testing Asset Fixity for U.S. Agriculture: Comment

Whether a farmer considers an asset fixed or variable as plans are made for managing the farm depends on current opportunity costs. Three opportunities are particularly relevant at the time a farm management decision is made: the value of an asset in use on the farm, the cost of acquiring more of the asset, and the benefits of disposing of some of the asset already owned by the farmer. In the event that an asset can be disposed of at the same price that it can be acquired, that asset is not subject to fixity and the three costs will equal one another on an optimally organized farm. Consider a pair of shoes acquired on a department store charge account. If, after taking them home, the buyer finds they pinch his feet, he may return them the next day and get his money back. The difference between acquisition cost and salvage value at this time is negligible; it is only the inconvenience of making another trip to the store. Suppose he discovers that the shoes pinch as he wears them at work the next day. The use value is now below the acquisition cost of another pair of shoes, but the salvage value of this pair has dropped precipitously. His current salvage opportunities now include giving the shoes to a relative, selling them to a used clothing merchant, or taking an income tax deduction by giving them to charity. Shoes were considered a variable asset when the buyer shopped for them. He expected them to be worth more to him than he paid for them. They were not subject to fixity until after he wore them. But that bit of history becomes irrelevant. Whether the shoes are a fixed or variable asset depends on whether the buyer can salvage them for more than the value he might get by tossing them in the closet with the expectation of wearing them occasionally. In the event that the current salvage value of an owned asset is below the acquisition cost of an additional and comparable one, the asset is subject to fixity. Whether it is fixed or not in a given situation depends on a comparison among opportunity costs that apply at the time the decision is made. If the opportunities for using the asset on the farm exceed the cost of acquiring more of the asset, the asset is variable and the profit-maximizing farmer will acquire more of it. If the opportunities for selling the asset in the salvage market exceed the value in use on the farm, the asset is variable and the profit-maximizing farmer will dispose of some or all of it. When the level of use of an asset is not worth changing, the farmer considers it fixed. The use value is less than or equal to the acquisition cost, so expansion is not profitable. And the use value equals or exceeds the salvage value, so it is not profitable to sell it. The three relevant costs have the following relationship on an optimally organized farm: acquisition cost equals or exceeds the opportunity cost of using the asset on the farm; and on-farm opportunity cost equals or exceeds the salvage value. These ideas are readily incorporated into economic analyses of individual farms. A farm manager need not decide prior to analysis what is to be fixed and what is variable. The list of fixed assets is determined endogenously as part of the farm management plan. The list of fixed assets varies with the initial farm organization in place at the time the planning process begins and with opportunity costs associated with buying, selling, and using assets subject to fixity. The difficulty with fixed asset theory is in its aggregation from firm to industry problems. The uniqueness of each individual farm organization is lost in the aggregation to all farms, and the off-farm opportunity costs which are appropriate to individual farm situations are not included in the aggregate price series used by economists to analyze the allocation of natural resources and purchased farm inputs among alternative uses. The aggregation problems and data limitations make fixed asset analysis difficult at the aggregate level despite its complete simplicity at the farm level. For example, farm machinery is subject to fixity. During a given interval, the level of machinery use may increase on some farms, decrease on some, and remain fixed on others. The net change in the aggregate-whether positive, negative, or zero-says little about the role of the fixed asset in aggregate production. Some degree of disaggregation is required. But these difficulties do not make the consideration of fixed assets in the supply response of U.S. agriculture any the less important. As Chambers and Vasavada put it, "asset fixity . . . must exist at the aggregate level" (p. 764). Inasmuch as asset fixity affects the supply functions of individual farms, it requires no great leap of imagination to suppose that asset fixity affects the aggregate supply function as well. The difficulty arises in trying to measure, and test the statistical significance of, asset fixity in the aggregate supply function. To illustrate for a situation of price reversal, supClark Edwards is an economist with the Economic Research Service, U.S. Department of Agriculture. Review was coordinated by Peter Berck, associate editor.