Aspects of the decision-making of the poor peasant household

1. Aspects of the decision-making of the poor peasant household Ajay Tankha Centre for Microfinance Seminar IFMR, Chennai 12 June 2008

2. Economic decision-making of the poor peasant household • Based upon results of a 1972 village study conducted with Ashwani Saith in Aligarh district, UP for Agro-economic Research Centre, University of Delhi. • The study attempted, among others, to understand the rationale of economic decision-making of poor peasant-cum-multi occupation households (HHs). • Criteria developed by the authors of the study to check the ‘viability’ and ‘efficiency’ of poor peasant HHs are discussed in the perspective of returns to their activities and the “rationality” of their economic behaviour.

3. Are peasant household’s irrational? Village study revealed that the vast majority of poor peasant (and non-peasant) poor households were engaged in multiple occupations Were peasant HHs “irrational” – participating in multiple activities instead of specialising in the activity that has maximum profit? Or was this a “survival strategy” - a calculated endeavour to eke out a subsistence in the face of forces that threaten to pauperise the HH? “Irrationality” hypothesis can be attributed to an incorrect application of frameworks and analysis of industrial capitalism to peasant HHs

4. Viability and efficiency conditions for entrepreneurial investment • Profits in an activity must be positive for investment to occur • Investment must occur in activity with highest rate of profit • Profit rate must be higher than lending rate of interest for any investment to occur – otherwise moneylending would be more profitable (Due weight to be given to risk discounting and discounting of future income) Poor HHs that rely mainly on their own family labour could be seen as inevitably violating these conditions.

5. “Negative profits” and the small peasant HH Do poor peasant HHs make “negative profits” ? “Negative profits” – a universal phenomenon However, consider also the “poor but efficient” hypothesis, “the resilient” and “industrious” small peasant and the inverse relationship between farm size and productivity Two illustrations: • Kautsky’s study of two farms in Baden in 1890s as – higher “profit” on small farm since maintenance cost of wage labour on larger farm was twice that of small farm which exclusively used family labour. “The surplus of the small peasant came not from his full corn bins but from his empty stomach.” (ii) Debate on farm size and productivity in India in 1960s - Farm Management Studies data showed that for certain classes of small farms were incurring “losses” in their cultivation activities

6. “Negative profits” – Issues in valuation of inputs and outputs • Evaluating inputs and outputs at market prices inevitably yields ‘negative profits’ in activities of the poor– e.g., buffalo rearing In the case of the small peasant-cum multi-occupation household “losses” could arise also due to errors in: (i) Treatment/pricing of by-products – cow-dung as fuel or fertiliser, buttermilk (ii) pricing of non-labour inputs and outputs - home-produced and consumed – need for internal shadow price for the household (as discussed later, this problem can be avoided by ignoring intermediate goods and considering the overall annual production programme of the HH)

7. “Negative profits” – Issues in valuation of inputs and outputs - contd. (iii) Imputation of wages Even the HH’s annual production plan as a whole may be unviable if wages are seen as ‘costs’ Total value of product – non-labour raw materials (inc. depreciation on fixed investment goods) – wages bill = Profits However, wage bill for the HH is difficult to evaluate on the basis of ‘standard’ market ‘wage’; besides (a) profits” depend directy on the “imputed” wages figure to be. (b) Fixed capital committed is very low and virtually the entire value added can be attributed to labour (c) Both wages and profits accrue to the HH in an undifferentiated sum.

8. “Negative profits” – Issues in valuation of inputs and outputs - contd. (iv) Irrelevance of the lending rate of interest The poor HH’s fixed capital exists mainly in the form of traditional inherited equipments (not loanable) the opportunity cost of which is zero HH owns some raw materials and finance - but usury not a meaningful option Labour power is the only flexible resource of the HH which seeks to obtain the “highest total value of output from its labour resources” for its production programme Utilisation rule for labour becomes “returns to labour are greater that the opportunity cost of labour in an existing alternative use”.

9. Technological structure of the HH’s production programme

10. Logic of diversification of HH activities Why should the HH split its investible resources into tenant cultivation, milch cattle and pottery? Two characteristics of HH’s production programme: • High degree of technological interdependence with outputs one activity employed as inputs of another • Very heavy labour bias in the technology – scale of operations depends heavily on amount of labour put in With (i) limited market for the goods produced by the HH and (ii) limited availability working capital and finance this leads to technological and seasonal dovetailing of household activities Diversification is an attempt to make up for shortage of working capital and finance – and also involves lower risks as compared to specialisation

11. Viability and Efficiency Conditions for the poor peasant household For the poor peasant household relying mainly on own HH labour in production viability and efficiency conditions can be rewritten as: • Viability condition: Total value of product – non labour raw materials costs ≥ real cost of labour used in its (annual) production programme • Efficiency condition: Total value of product – non-labour raw materials ≥ opportunity cost of labour power used (i.e. in terms of an alternative annual production programme)

12. Cost of labour power: Evaluation of the HH’s aggregate production programme Economic objective of HH is maximisation of value of total output – this maximises HH “surplus” because the HH has complete control over its consumption The cost of labour is necessary to: • Evaluate the viability of the HH’s annual production programme (ii) To provide a criterion for choice between alternative employment opportunities available to the household Recalling the viability condition: Total returns (TR) ≥ real cost of labour used, here the term real cost of labour power must refer to the cost of maintaining the household’s labour supply for the year, without producing malnutriition as a side-effect – the simple reproductive cost of labour power (SRC)

13. Cost of labour power: Evaluation of the HH’s aggregate production programme – contd. TR - SRC = S (surplus), which could be positive, negative or zero. The household can rank alternative annual production plans by their viability Comments on the Viability condition: • SRC represents a socio-economic-nutritional norm (even a range of possible levels) distinct from actual consumption levels – and has no relation to the market wage rate which may be above or below it • The price of labour fluctuates seasonally in a wide band around, and usually below the SRC.

14. Cost of labour power: Evaluation of the aggregate programme – contd. (iii) If HH produces a positive surplus, it can consume, save or invest it. If surplus is negative there will be underconsumption which over time will impact on the HH’s supply of labour power. (iv) In general, whether or not the HH makes a surplus depends upon its overall resource ownership and ratio of working to non-working members. (v) Whether or not returns flow in regularly a steady rate of consumption, dependent on the total annual performance of the HH has to be maintained - the average daily consumption rate (DCR) (vi) If the household is making a surplus, the daily consumption rate of the HH (DCR) will be greater than the SRC and vice versa.

15. Cost of labour: Criterion for choices at the margin From the set of available employment opportunities how should the HH choose the combination of activities for inclusion in its annual production programme? (i) Initially order activities by decreasing magnitude of surplus for comparable operative periods. (ii) However, what is the relevant opportunity cost of labour against which marginal returns are to be equated at the margin of employment? Consider two cases: Case One: TR < SRC; S < zero; underconsumption present Case Two: TR > SRC; S > zero; Surplus-making HH

16. Cost of labour: Criterion for choices at the margin –contd. Case One: TR < SRC; S < zero; underconsumption present Market wage cannot be used for deriving the criterion governing the HH’s marginal decisions related to employment since it is specific to season, activity and skill. Other cost criteria: • Marginal condition cannot be MR/day = SRC/day. If S < zero for the HH it cannot be fully employed before this point and aggregate output can be increased even with MR/day < SRC/day • Similarly with MR/day = DCR • Objective of output maximisation is fulfilled only if MR/day = marginal real cost of labour power (MRC) What is the marginal real cost of labour power ?

17. Cost of labour: Criterion for choices at the margin –contd. Assume DCR = one meal a day and SRC = 2 meals a day. The HH can do half-a day of labour without incurring further consumption costs - provided MR is positive. To work a full day it would require one additional meal/day which would represent its marginal real cost of labour power. There are two parts to MRC of labour – initially zero and positive thereafter. The zero segment depends in turn upon the Total Returns (TR) for the HH’s production programme. Paradoxically, the closer the TR to SRC and DCR to SRC/day the greater the labour power the HH can expend without raising MRC above zero. Criterion of equating marginal utility of the marginal return with the psychological disutility of of manual labour is irrelevant to the case of the negative surplus–making poor peasant household

18. Cost of labour: Criterion for choices at the margin –contd. • Three cases possible: (i) HH comes to full employment before MR=MRC (ii) MR = MRC before it HH is fully employed (iii) HH has stopped working because all employment opportunities have dried up In Case Two: TR > SRC; S > zero; Surplus-making HH, which implies DCR > SRC/day, and MRC is always zero • Apart from the three cases above, a surplus making “non-poor” HH which can afford the luxury of non-work (or leisure) – when the usefulness of a day’s non-work is greater than the MR/day – may voluntarily stop working at a point where MR/day > MRC This situation (imputing usefulness to non-work) may be reached only after a certain minimum level of positive surplus has been achieved in the HH’s aggregate production programme

19. Summary: Fundamental difference between tools and frames of analysis of capitalist economy throw up non-meaningful conclusions for peasant HHs Criteria were developed for checking the viability and efficiency of small peasant HHs. While “efficiency” is meaningful for the analysis of such HHs, viability loses its meaning because the HH, for its survival, undertakes a production programme even if its unviable, i.e., TR < SRC. The poor HH, which owns only labour, cannot convert it into consumption goods except through its sale under adverse conditions. However, it seeks to be ‘efficient’ in the conditions it finds itself in through diversification in the use of its labour resources.