A Long Run Profit Function and a Review of the Returns to R&D

Abstract

This chapter extends the work of the previous chapters by fitting a long run profit function to investigate the sources of output growth in South African agriculture. In the long run, all the conventional inputs are treated as variable, but the technology-related variables are fixed because they are beyond the control of farmers. The long run elasticities are entirely consistent with the short run results and are easier to interpret. However, education still has negative effects and the rate of return to public R&D is 113 per cent, as compared with the short run result of 44 per cent. The higher return reflects the fact that new technology is embodied in the capital items, but the long run model raises a new problem since the last chapter showed that capital stock adjustment takes 11 years. If this is assumed to be the correct lag length, the long-run ROR falls to a more reasonable 58 per cent.