Profit, rent and the terms of trade

Andrews (1985) investigates the theoretical coherence and policy relevance of our (1982) model and concludes, contrary to our own findings, that a positive rate of profit is not necessary to obtain a two-signed derivative of the profit rate with respect to agriculture's terms of trade. She characterizes the model as ‘Neo-Ricardian’ on the grounds that the technology is the ‘culprit’ and also questions the empirical relevance of our ‘fixed profit equilibrium’ or ‘land-price treadmill’. We show here that if a viability condition stated in our original paper holds, parameter values of the model must yield a positive rate of profit if the profit rate is to fall following an improvement in the terms of trade. We then contrast our model with a more neoclassical one in which the sign of the derivative does strictly depend on the ‘technology’, that is, upon factor intensities. Finally, we present empirical evidence from a detailed study of the U.S. economy based on our original model. These data support the existence of a land-price treadmill in agriculture, especially for countries in which workers are successful in defending a given real wage.