Farmers’ Suicides Revisited for a Third Time: An Economic Analysis

Atanu Dey writes on his blog an interesting economic analysis for the reason behind the continuing practice of farmers committing suicide. He likens the phenomenon to that of a parent repeatedly tying his child’s shoe only for it to become untied again.

He had correctly identified the superficial problem: kid running around with untied shoelaces is likely to trip and go for a toss. But he had no idea of what the deeper problem was, and that he was indeed the cause of the problem. In fact, his actions merely intensified the problem. He was mechanically reacting to the untied laces without stopping to figure out why they were coming untied. He did not realize that they were coming untied because the kid was untying them and why.

The man would sit the kid down on the seat and, while continuing to talk to his friend, use all his adult strength to tighten the laces. Then, and out of sight of his father, the kid would untie them because they were uncomfortably tight. The next round the father would tie them even tighter and the pattern was repeated. If only the man had had enough sense to figure out the problem, he would have tied the laces lightly. The kid, busy in his play, would not have even have noticed that he was wearing shoes.

Dey continues on to talk about how the current means to alleviate famers’ burdens are similar in that they only address the superficial issues facing the Indian agrarian and that unless these are addressed the suicides will continue.

The farmers’ face a chronic problem and therefore an acute short-term solution is inappropriate because it will merely postpone the actual solution and thus set the stage for intensified and more wide-ranging problems.

The biggest problem India faces is the inability–and I think more unfortunately  the unwillingness–of its policymakers to understand what the basic problem is. They routinely try to apply band-aid solutions to systemic problems.  That’s our greatest challenge.

The economic analysis is after the jump.

A bit of Arithmetic

Let’s make a simple 2-sector, 2-good model. The sectors are agricultural (A) which produces food (F), and non-agricultural (NA) which produces manufactures (M). Let’s assume the following conditions.

  1. Total population is 100.
  2. Full employment.
  3. Autarky. That is, there is no foreign trade.
  4. Food satiation. You cannot consume more than one unit of food.
  5. No non-food satiation. You can always consume as much M as you can get.
  6. Perishable. Both F and M have to be consumed in the period produced.
  7. Terms of trade determined by the demand and supply of F and M.

So if 70 people work in A, then the maximum production is 100 units of F.  That maximum is dictated by the total demand for F, which is 100 units for the total population. Therefore the average income in A is 100/70, or approximately 1.5 units of F. Per capita they consume 1 unit of F, and so the average disposable income in A is 0.5 units of F, which can  be used to buy M. Let’s call this state “I2008″ — what is pretty much the condition in 2008 in India.

If instead of 70, only 35 people work in A but still produce 100 units of F. With this higher productivity, the per capita income doubles to approximately 3 units of F, and the per capita disposable income is 2 units of F.  Let’s call this state “I2050″ — possible but not certain for India in 2050.

If the US population were 100 people, then their A sector employs 2 people. The average income in the A sector is 50 units of F and the average disposable income in the A sector is 49 units of F. We will label this state “US2008.”

The worker in the A sector in the US is wealthier than the Indian A sector worker because the former have higher productivity. That higher productivity is the result of capital: more machines, more inputs (mostly hydrocarbons for fuel and fertilizers), and more human capital. Whether the A worker in the US is more efficient than the A worker in India is a matter that we will not go into: it is a different issue and going into it will only complicate the point that we are investigating now, which is why are Indian farmers committing suicide and what can be done about it.

To sum up . . .

Average income depends on average productivity. When the surplus production of food by seven people is only sufficient to support an additional three persons, the disposable income of the agricultural sector is very limited.

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