All this when the matter is looked at in the aggregate; when, that is to say, reference is made to what is called the ‘general price level’. What happens to ‘relative prices’ ? In our anxiety to bring out the broad effect of investment and saving upon the economy as a whole, we often forget the affairs of individual markets and the forces that govern the movement of individual prices.
In the short period at any rate which is the period that is relevant when we talk of Five Year Plans there is no reason why individual prices should move in the way the general price level moves. This is common knowledge, and yet the matter has become particularly significant from the point of view of planned economic development where the pattern of investment is controlled with a view to certain long term objectives and is not adjusted to short term profits. In fact, it should be possible, in the context of economic planning, to read off from the pattern of investment relatively to the consumption propensities of individual groups in the society how the various markets are to be affected by the Plan during any given period. So economic development is important.
Imagine the extreme case where planned investment is fully matched by planned saving, and the flow of output of consumption goods of various kinds remains more or less constant. Employment increases in the investment goods sector. But, since at the initial stage of planning there is unemployment, both open and disguised, this increase is not at the expense of employment in the consumption goods sector. The newly employed labourers in the investment goods sector are paid at the current rate of wages prevailing in the economy. The additional expenditure done by the newly employed labourers is, however, neutralized by the curtailment of expenditure through saving done by the rest of the community. The general price level, of course, remains the same. But, unless the pattern of saving is such that expenditure is curtailed by the rest of the community on just those goods on which the extra expenditure of the newly employed labourers has its impact, individual prices do move in different directions. Some prices rise and some prices fall.
This aspect of the matter is often overlooked when attention is fixed on total investment and total saving. In fact, in practice, savings, including taxes paid to the Government, come from people who could ordinarily afford to buy luxury or near-luxury goods. And when they are asked to save more or to pay more taxes, they tend naturally to curtail the consumption of these goods. On the other hand, the people (mostly labourers) to whom the money thus saved this via the investors, are more prone to spend on necessaries. Thus, though the total expenditure in money terms remains more or less constant, the prices of necessaries wage goods, that is to say tend to rise and the prices of non-wage goods tend to fall. Food happens to be the most important item in the labourers’ budget. It has also an inelastic demand, so far as the budget of the rest of the community is concerned. Whereas, therefore, increased employment in the investment good sector leads to an increased demand for goods, there is no corresponding curtailment of its consumption on the part of those from whom savings come. It is thus inevitable that food prices should rise in the process of planned economic development unless provision is made in the Plan itself to increase the supply of food (either through internal production or through imports) pan passu with increasing investment involving increasing employment of labour. So economic development is important.
Imagine, on top of this, a dose of deficit-financing. If this happens, the general price level rises, but the prices of wage goods rise more than in proportion to the rise in the general price level. Further, even if the output of various consumption goods rises during the Plan period, the same tendency operates if the volume of deficit-financing exceeds what is often called the ‘safety limit’. Relative prices do get distorted, the reaction in individual markets depending upon the expenditure pattern of the community relatively to the supply of individual goods. So economic development is important.