Choice of technique-III
However, the matter may be put somewhat differently so as to conform to our accepted economic criterion. The economist cannot obviously decide on any issue between objectives. But cost-price considerations are surely within his domain. And in this particular context of choosing the technique, we do not need to go beyond these considerations; the enunciation of alternative objectives is beside the point.
The accepted economic criterion for a policy decision is the criterion of minimum cost. Applying this criterion, we might say that, if for producing a commodity, different alternative techniques are available, that technique is to be chosen which conforms to the principle of minimum cost. The condition of minimum cost as regards the kind of hypothesis that we have taken is, as we have seen, an equation between wage rate and the marginal productivity of labour. At what technique would the condition be fulfilled ? The real problem lies here, for it depends upon what wage rate we take into account for purposes of our calculation. If we go by the market wage rate, which is given by ‘/WOL, the technique at R is the relevant technique. The marginal product of labour is given by the slope at any point on the g-curve. At 5 where the tangent is parallel to OW, therefore, the marginal product of labour is equal to the price of labour. If, on the other hand, we go by the opportunity cost principle, and equate the price of labour with social cost and further assume, in view of the existence of unemployment, that the social cost of employment is zero, the relevant technique is the technique at r, for it is here that the marginal product of labour is also zero. So choice of technique is important.
The point of enquiry, therefore, is not what objective we should choose; the objective is indeed unique, namely to minimize cost. The pertinent enquiry is rather whether we should go by the actual market price of labour or by some ‘shadow price’ given by the opportunity cost of labour. This problem relates specially to the labour market, for however low the opportunity cost of labour may be, there is a minimum below which the market rate of wages cannot go. Even in a state of acute unemployment, a labourer may not choose to accept a job unless he is paid at the existing wage rate, even though the alternative that he is surrendering is just unwanted leisure and no product.
And yet if we consider the matter from the point of view of society, the market rate of wages ceases to be relevant. What matters from the point of view of social cost is the alternative product displaced in the process of the employment of labour. And if that is nil, the point of maximum output coincides with the point of minimum cost. So choice of technique is important.
What happens, however, to ‘surplus’ the basis of growth? To answer this question, let us make an extreme assumption. Let us assume that the extra wages of the newly employed labour spent on current consumption are fully compensated by saving done by the rest of the community and that this extra saving, even though a part of it may come via additional taxation, is not accompanied by any loss of product to the society in other directions. On this assumption, since savings result in mere transfer of income, the point of maximum output remains the point of maximum surplus, too. Applying the criterion of minimum cost, we have here at the same time maximum output and maximum surplus. What is more important is that the condition that we are postulating here is fulfilled even if a part of the savings is drawn forcibly through inflation, in so far as the consequent reduction in the real wage rate does not affect efficiency of labour.
This extreme assumption, however, does not apply in practice. Even in a state of unemployment, the employment of labour, if carried far enough, does involve social cost, even if indirectly, through loss of efficiency on the part of the agencies from which savings are drawn. The social cost of employment of labour in an over-populated, under-developed country is surely less than the market rate of wages, but we shall go wrong if we equate it to zero just because there is a plethora of unemployed labour.
In choosing our technique of production we must go by a ‘shadow price’ of labour given by the opportunity cost. But it will be rarely that the criterion of minimum cost will justify the adoption of a technique that would correspond to maximum output. So choice of technique is important.