One of the distinctive features of an under-developed economy is the prevalence of what our economists are now in the habit of calling ‘disguised unemployment’. Too many people subsist on agriculture. Seemingly they are employed. But their employment is not wholly productive.
It is not wholly productive in the sense that production does not suffer even if some of the so-called employed are withdrawn. The ratio of labour to land and other resources is so large that the marginal productivity of labour is reduced to zero, although the average productivity remains positive. And, unlike in the organized sector, it is this average productivity and not the marginal productivity that determines the earnings, and hence consumption of the labourers. The result is that the marginal body of labourers consume, but they do not produce. They are employed physically, but not economically. Economic development is important.
The organizational set-up (such as we have in a subsistence economy) is what makes for this. Farms consist of family holdings, and productive operations are done by the members of a family as a group. Labour is not dissociated from capital, and workers may be said to be self-employed.
There are the landlords and the moneylenders. But they get their rent and interest at stipulated rates; they do not perform the function of an employer. Whatever output is derived from productive operations therefore vests in the family and is enjoyed by all the members irrespective of their specific contribution; the redundant members are not just thrown away. The share of output that goes to the redundant units of labour is of the nature of transfer income. If, of ten persons working in a farm, four are redundant, in the sense that the farm could be managed equally efficiently with six persons, then, from the economic point of view, 40 per cent of the output of the farm can be viewed as being transferred to unproductive consumers. It is as if the entire output is the contribution of six persons who just ‘save’ a part of this contribution and hand it over to the remaining four. Professor Nurkse calls this the ‘saving potential’ of a subsistence economy. Economic development is important.
On this concept of ‘saving potential’ as a concomitant of ‘disguised unemployment’ C. N. Vakil and P. R. Brahmananda have built a theory of economic growth.
1 Planning in an under-developed economy, if it is to be effective, must, according to our authors, take account of ‘disguised unemployment’ of the subsistence sector and make full use of the ‘saving potential’ that is associated with it. The process can be initiated only if the increase in the volume of employment in the planned sector is made to exceed the addition to the labour force consequent on the growth of population. So long as our plan seeks just to absorb the additional labour force that comes into the market as a result of population growth, the disguised unemployment remains untouched and with it the saving potential. Once, however, our planned investment passes this limit, a cumulative process of expansion sets in.
The argument runs in terms of a theorem. Suppose that the value of wage-goods needed to employ an additional unit of labour in the planned sector is Rs 400 whereas the actual consumption of a corresponding unit in the subsistence sector is Rs 200. Then, if the planned sector can somehow secure an extra saving of Rs 400, the additional employment created will be two units instead of one. For, while with the saving of Rs 400 done in the planned sector one unit of labour is productively employed, the withdrawal of this unit from the subsistence sector is accompanied by a release of Rs 200 worth of wage-goods. This can now be added to another equivalent bundle of wage-goods to be released if one more unit of labour is withdrawn from the subsistence sector.
The economy is therefore in a position to absorb altogether two units of labour in productive employment, although the initial dose of saving was just enough for one unit. Saving thus breeds saving, and we have a so-called ‘multiplier effect’ on employment, the value of the ‘multiplier’ depending upon the ratio of ‘wage unit’ in the planned sector to what may be called the ‘consumption unit’2 in the subsistence sector. The lower this ratio, the higher is the value of the ‘multiplier’.