How Economic Theory Should Guide What We Measure

Abstract

Producers need economic information to make production choices, and a major source of such information is the enterprise cost and returns budget. Economic policy decisions for agriculture require information developed and analyses guided by the same economic theory. The body of economic theory contains some guidelines in developing methods for estimating commodity costs and returns. There is some consensus on several procedures that appear to be consistent with both economic theory and the logic of using an enterprise budget as a planning tool. In 1980, Thomas A. Miller and Melvin D. Skold examined what economic theory says, if anything, about the allocation of fixed cash expenses to individual enterprises. Capital replacement and depreciation charges rest on financial theory, more than economic theory. Economic theory offers little support for the idea that some exogenous land cost must be covered by agricultural returns in either the short or long run.