Farm Finance and National Economic Policy—Some Gaps in Knowledge

Abstract

port on the status of knowledge to the profession. Emanuel Melichar, with the Board of Governors of the Federal Reserve System, and this paper's author are involved in a review of agricultural finance literature. This paper builds on materials that have been reviewed. This paper does not fully treat the broad subject of farm finance as related to national economic policy. Omitted are issues of taxation, price stabilization, loan guarantees, business cycle relationships to agricultural credit markets, differential effects of inflation on agriculture and other sectors, and others. Although such issues merit further research and discussion, the purpose here is to focus on a relatively few important topics, to review research on those issues, and to suggest gaps in knowledge. The basic assertion made in this paper is that agricultural finance research is too heavily oriented toward micro economics and not sufficiently concerned with national economic policies. While micro economics is important and should receive reasonable emphasis, it is also true that national economic policies affect capital formation in agriculture, functioning of financial markets in rural areas, and the flows of funds between agriculture and other sectors. To the extent this assertion is valid, it is, perhaps, largely because of agricultural economists' training in economic theory. Undoubtedly most agricultural economists have received more exposure in micro theory than in macro theory. Another possible reason for this micro orientation is that micro theory suggests more easily tested hypotheses than macro theory. There is, perhaps, danger in overemphasizing the importance of economic theory with respect to research results. However, this position stems from the methodological importance of theory in specifying the main economic relationships of relevance in research. Economic theory provides the basis for delineating hypotheses to be tested and specifying the relationships to be measured. In many cases gaps in our knowledge of agricultural finance issues stem directly from gaps in he underlying economic theory. The four topic areas discussed here are: (1) capital formation in agriculture as affected by national economic policy; (2) the effect of national monetary and credit policies on investment and production in agriculture; (3) functioning of rural financial markets; and (4) the sources and uses of funds approach in the analysis of agricultural financing.