Explaining Productivity Change in Underdeveloped Agriculture. Can the Theory of Induced Innovation Do It?

The microeconomic version of the theory of induced innovation extends the logic of factor substitution and static efficiency to the process of technical change and attempts to show that the ‘bias’ of technical progress in agriculture will work in the same direction as factor substitution at given technology, with factor proportions changing in inverse relation to relative factor prices. This article argues that even within the model itself, the scope for rising labour productivity associated with land-saving technical progress appears to be rather limited. Econometric studies of technical change in Japanese agriculture support this view. Moreover, the theory of induced innovation tends to confuse static efficiency with ‘dynamic efficiency’ implying investments, technological progress and changing factor proportions over time. The theory of induced innovation does not identify any driving force of technical change. Therefore, it cannot explain adequately why technical progress takes place or does not take place. The article concludes by arguing that in an agriculture of poor smallholders, price control and price stabilisation rather than market-driven changes of relative factor prices are important in stimulating technical progress.