If the aggregate supply of tenant labor to farming is upward sloped, the increased farming intensity will bid up the wage rate, making the curve Wt in figure 7 swing upward. The predicted resource reallocation will thereby be somewhat dampened, but not entirely cancelled. To the extent that the tenants work harder or for longer hours, the tenants' incomes from farming will rise at the expense of leisure and comfort. To the extent that the landowners' incomes from land are confined strictly to
of the annual yield, their incomes will fall. To the extent that resources are directed from other industries to agriculture as a whole, the total agricultural output will rise.[2] But the discrepancies in the marginal products of resources in the various sectors imply economically inefficient use of the existing resources of the society.
[1]. Note that as long as the law of diminishing returns to tenant labor holds, rental income for the landowner under the share constraint will never be as high as it was initially.
[2]. This implies that the prices of farm products will fall relative to those of other goods, which further reduces the value of the marginal products of tenant inputs. The general implications of resource reallocation remain unchanged, however.
C.Fixed Total or Percentage Rent Restriction? A Confusion between the 1949 and 1951 Provisions
Before we proceed to test the implication of increased farming intensity in the next two chapters, it is essential to point out that, under the share restriction in Taiwan from 1949 to 1951, there existed no law prohibiting the landowners from reducing land size per tenant or accepting more tenant inputs competitively offered by tenants. According to several writers, however, the rental restriction in Taiwan was a fixed and not a percentage restriction, which would mean that the landowner's incentive for increasing tenant inputs over land was eliminated.[1] This confusion in law requires clarification. To cite a typical example, let us turn to Sidney Klein:
The incentives among tenants to invest their hard-earned precious incomes were great.… Under the rent reduction statutes, their rent was fixed at 37.5 per cent of the standard or expected yield and not the actual yield harvested, so that when they sold the harvest above the standard yield they could keep all the proceeds for themselves.[2]
Klein is essentially saying that the landowner's rental receipt was fixed according to some standard after the share reduction, and therefore the tenant's incentive was high because he could keep the residual. But as we saw at the beginning of this chapter, any increase in tenant input will not pay, since the initial rental percentage implies that the marginal tenant cost equals the marginal product of tenant input. Thus, if rent were reduced to a fixed total, the tenant would not invest more in the existing farm; and even though he is willing to commit more input to acquire the lease right, the landowner would be indifferent to any incremental input. Only if the rental percentage ceiling is set lower will the tenant commit more inputs under competition, since it will be to the landowner's interest that he do so.
Klein, like several others, confuses two different laws: (1) the new 1951 Rent Reduction Act, versus (2) the enforcement of
at 37.5 percent which was carried out in April 1949. Under the 1949 provisions, the owner's share was reduced to 37.5 percent of the annual yield, not of a standard yield.
Before we turn to the law proper, let me quickly dismiss Klein's interpretation by referring to the judgment of the lawmaker. Writing in 1951 and speaking of the 37.5 percent maximum rental share regulations of 1949, Cheng Chen stated:
The enforcement of the program took only a period of three months, from April to June 1949, when new contracts were signed. ... It was almost incredible that the program was so smoothly put into execution.… The most important factor was that rice production increased by 20 per cent in 1949 compared with the previous year, thereby in most cases preventing the landlords from suffering great losses as they received approximately the similar amount of foodstuffs as rent as before.[3]
Furthermore, according to the official report, in a comparison of the first phase of Taiwan land reform with a similar reform measure which began earlier in a few provinces in mainland China, it is discerned that the basic difference lies in the percentage rate of reduction: In mainland China it was a 25 percent reduction of the original contractual rent rates; in Taiwan the rental maximum was a flat 37.5 percent of the yield ''actually harvested."[4] Also, the enforcement of the share restriction in Taiwan was conducted by inspecting the yield at harvest time.[5] If the rental restriction were indeed on a fixed and not a percentage basis, the yield need not be checked at all.
Let us trace carefully how this rental share restriction has been erroneously interpreted as a rental restriction at 37.5 percent of a fixed standard. Turning to the actual provisions of 1949, we find:
Before the land value is assessed according to law, the lease of all private farm land shall conform to the order… dated March 29, 1947, which provides that the amount of farm rent shall not exceed 37.5 per cent of the total annual yield of the main crops. If the rent originally agreed exceeds 37.5 per cent, it shall be reduced to 37.5 per cent; and if it is less than 37.5 per cent, it shall remain unchanged.
The main crops referred to in the preceding paragraph shall be chiefly the crops customarily accepted as payment of rent.[6]