Economy of

Economy of1 The fact is that a large part of the economy of the under-developed countries does not come under money fansactionsat all, and even where it does, in so far as the organization of the industry is such that the worker works with his own tools (e.g. cottage industries), the level of activity is determined by considerations of gross income and not of net profit.

The conditions in these sectors conform closely to those of Crusoe economy where the level of activity is within the control of the workers themselves and where, therefore, Harrod’s prime determinants—viz, Diminishing Utility of Commodities, Increasing Dis-utility of Work and Diminishing Returns— function in their pristine form.1 All this explains why in India, for example, the depression of the thirties did not affect employment so much as it did prices, and why, on the other hand, the stimulus to investment during the last war was almost immediately followed by inflation and a rise in money wages.

The possibility of involuntary unemployment is not denied, in so far as even an under-developed economy may contain an organized sector wherein the Keynesian propositions hold good. But its magnitude is not likely to be appreciable, if only because the marginal propensity to consume in a low level economy, despite large inequalities of income, tends to be relatively high; and, although investment opportunities are limited, yet, when account is taken of the fact that most of these economies are characterized by a rapidly growing population, they should not normally lag behind the rate at which people are inclined to save. Indeed, whatever the generality of the General Theory may be in the sense in which the term ‘general’ was used by Keynes,2 the applicability of the propositions of the General Theory to conditions of an under-developed economy is at best limited.

Keynes makes liquidity preference the villain in his diagnosis economy of the stagnation of an under-developed economy ‘The history of India,’ he says, ‘at all times has provided an example of a country impoverished by a preference for liquidity amounting to so strong a passion that even an enormous and chronic influx of the precious metals has been insufficient to bring down the rate of interest to a level which was compatible with the growth of real wealth.’3 The levelling down of the structure of interest rates would surely be welcome in a country like India as a measure towards a better distribution of income. But it is doubtful, in spite of Keynes, if it  would have any significant effect upon output and employment. The experience of the last war has taught us that the monetization of precious metals would, in the economic set-up of the country, work more towards a rise of prices than towards the ‘growth of real wealth’; the operation of the multiplier would be swamped by a rise in money wages.

The trouble in India at all times has been not that the influx of precious metals did not find expression in an increased supply of money the absorption of precious metals into hoards at least kept up an export surplus for the country. The trouble has been, on the other hand, that the influx of precious metals was not replaced by imports of capital goods as such.
Paradoxically, in spite of growing population and shortage of capital relative to labour, India, as other under-developed economies, has at all times suffered from a low marginal efficiency of capital. The unhealthy preference for precious metals as against capital goods is to be attributed to this. The cause of a low marginal efficiency of capital in these economies, however, is to be sought not in the direction of Keynes but rather in the direction of J. B. Say. If the curve of marginal efficiency of capital has to be raised, what is needed is, as Rosenstein-Rodman has shown,1 a simultaneous development of a number of industries the supply of goods in one creating demand for goods in others. And this involves an expansion in the aggregate stock of capital resources. The limiting factor in the growth of employment in an economy of such as ours is not so much a shortage of money as a shortage of real capital.

With the existing capital equipment, even if we have ‘full employment’ in the Keynesian sense, a large volume of unemployment will still remain in the physical sense. When capital equipment is low and population large, marginal productivity comes down to the level of the marginal disutility of labour at a stage where unemployment still persists in the physical sense, though not in the ‘involuntary’ sense. Our economists, misappropriating a term that Mrs. Robinson uses in another context,2 often call it ‘disguised unemployment’. In fact, however, it is a phenomenon which is not connected in any way with a fall in effective demand, nor does it go along with excess capacity in capital resources. It is there because the maximum capacity of capital equipment is inadequate to fully employ the available labour.  This suggests a notion of shifting points of ‘full employment’ equilibrium. With each expansion of capital equipment, the marginal productivity economy of labour rises and, the disutility curve of labour remaining constant, we have a higher level of ‘full employment’.

The notion of an ascending level of ‘full employment’ emerges readily from the hypothesis that the potential marginal productivity of labour with reference to an increasing supply of capital resources is larger than the marginal productivity as it actually is. Capital saturation is marked by a stage where absence of involuntary unemployment ensures absence of unemployment in the physical sense, too, barring frictions due to lack of mobility of labour.

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