Choice of technique-II
The answer given to the question by the post-war economic theorists who have worked in this field has been based on alternative criteria of policy. I shall take two of these criteria which have figured rather more conspicuously the criteria of maximum surplus and maximum output, and see what they precisely mean. For my purpose, which is just illustrative, it is enough if we take the simple, single-product model.
Given the volume of capital, the output is a function of the amount of labour employed, i.e. of the labour-capital ratio. Thus, with each technique of production, there is a corresponding output. The form of this function is, however, such that as we go on increasing the labour-capital ratio, the resulting output increases up to a point and then it declines. There is, therefore, a certain labour-capital ratio which corresponds to maximum output. So choice of technique is important.
There are those who argue that, since the opportunity cost of unemployed labour is zero, employment of labour should be carried up to the maximum output and the technique adjusted accordingly. This certainly is a point where we have currently the highest standard of living for the population. If we go beyond this, we increase employment, but we reduce output at the same time. On the other hand, there is another point where, at given wage rate, the surplus of output over the total wage cost is maximum. The technique which yields maximum surplus is, given a positive wage rate, necessarily less labour-intensive than the technique which yields maximum output.
That we should not choose a technique less labour-intensive than the one that yields maximum surplus or that we should discard any technique more labour-intensive than the one which yields maximum output, is agreed on all hands. But as between maximum surplus and maximum output there is, it is held, a real problem of choice. Assuming that the whole of wages is spent on consumption and the whole or a constant proportion of the surplus is invested, it is argued by some that the technique which yields maximum surplus is the one that should be adopted for it makes for maximum rate of growth. Let me illustrate the point with reference to a diagram which A. K. Sen employs in this context. So choice of technique is important.
Measure labour along the horizontal axis, OL, and product along the vertical axis, OP. Suppose the given volume of capital is OC,.
labour, you have the resulting product given by the curve Q, which slopes upward up to a point, say, M, and then declines. The labour-capital ratio is given by /_RCO, Z.rCO, etc., and the corresponding total output is measured by RS, rM, etc. OW is the total wage curve. It is a straight line by hypothesis, for the wage rate (given by /. WOL) is constant. Since the curve Q starts sloping downward from M, the point, M, represents maximum output, while the point, S, tangent through which on the g-curve is parallel to OW, represents maximum surplus. The corresponding techniques are given by the labour-capital ratios measured by /_rCO and /_RCO. If you are interested in maximizing the current level of income, choose your technique at M. If, on the other hand, you want the rate of growth to be maximized and work for a higher income for the future generation, choose your technique at R.
This is how the problem is usually stated. So sharply are the objectives often contrasted that at least one writer has been led to wonder if the problem posed is a problem of choice of technique at all if it is not just a choice of objective. So choice of technique is important.