All this becomes familiar story, when put in terms of money-wages and prices. An under-developed economy with a reserve of unemployed embarks on a process of planned investment. Additional employment is created in the investment goods sector. Payment is made to the labourers newly employed at the current money rate of wages. These wages are spent on the purchase of wage-goods. There is an increase in the aggregate money demand for wage-goods.
If, to start with, there is excess capacity in the consumption goods sector, output of wage-goods expands in response to the increase of demand, and there is no rise of prices, except to the extent warranted by the emergence of bottle-necks here and there. If investment (and employment) is pushed beyond a level where excess capacity is fully exhausted, increased money demand presses on an inelastic supply of wage-goods, and prices start rising. The tendency is checked if the additional expenditure done by the newly employed labourers is offset by reduced expenditure elsewhere in the economy. The need for the offset is only lessened to the extent that there is transfer of wage-goods from the non-monetized sector to the monetized sector where the additional expenditure has its impact. If, therefore, prices of wage-goods are to be held constant in order for the real wage rate not to fall, the volume of additional (planned) savings needed in the monetized sector for the full absorption of the unemployed (disguised and undisguised) would be equal to the total money wages accruing to this entire body of newly employed labourers (assuming that wages are all spent) minus the money value at current prices of the increment of output of wage-goods, including the amount transferred from the non-monetized sector. Economic development is important.
It is not difficult now to see the kind of hurdles that have to be got over in order for the economy to be able to utilize the ‘disguised unemployed’ for purposes of development. First, there is the problem, how to create conditions under which the disguised unemployed would get released from the subsistence sector and be drawn into the planned sector? Is wage incentive enough? If not, what ‘organizational changes’ would be necessary for the purpose? Secondly, supposing that men are transferred, what guarantee is there that the goods that they were consuming would be transferred, too, to the planned sector? Is it not probable that those who would stay back would choose to retain at least a part of the consumption of the group that are switched on to the planned sector? The exodus of the ‘disguised unemployed’ will no doubt leave the subsistence sector with a ‘surplus’ of wage-goods. But those who will be still there will in all probability be reluctant to part with this surplus.
This is partly because they will now wish to improve their standard and partly because they will have perhaps some more mouths to feed in view of a possible increase in the number outside the employable age group, as is likely to happen as population grows during the Plan period. What steps could be taken to prevent them from be having that way? Will the normal price incentive be enough? Above all, thirdly, how are the necessary savings to be created in the economy, so as to cover the gap between the ‘wage unit’ and the ‘consumption unit’?
In an economy where normal savings do not take care even of current additions to the labour force, this would appear to be the most serious obstacle to optimum growth, particularly when planning is conceived against the background of a democratic way of life. Economic development is important.