The response of peasant farmers to price incentives: The use and misuse of profit functions

The article is set in the context of evaluating the debate between the free‐marketeers [Schultz et al] and the institutionalists [Myrdal et al]. It surveys the literature on the application of profit functions to agricultural production in LDCs. In particular it provides a critical review of the literature which focuses on the inadequacy of economic theory, the problems of econometric specification, data limitations, and the contradictory nature of the econometric results. Overall, it is argued that the profit function is inappropriate on theoretical grounds and that most of the economic applications do not support the model. The article concludes with suggestions for future work which should take account of the role of class, power, and interlinkages in an historical context. Social and institutional factors, it is argued, are important in determining the behaviour of peasant farmers.