Wage-Goods Model and Strategy of Development | Economics

In this article we will discuss about:- 1. Introduction to Wage-Goods Model 2. Components of Wage Goods Model 3. Disguised Unemployment and Wage-Goods Model 4. Wage Goods Strategy Further Developed and Modified 5. Arguments 6. Critical Evaluation.

Professors Vakil and Brahmananda adapted and modified classical theory of growth of income and employment in the context of today’s developing countries characterised by disguised unemployment. In sharp contrast to Mahalanobis model which emphasised the role of fixed capital, Vakil and Brahmananda laid stress on wage goods or what they called liquid capital in determining the growth of employment and income. In conformity with their emphasis on wage goods or liquid capital in their model they propounded a strategy of development which accorded the highest priority to wage-goods industries, especially agriculture, in allocation of investment resources.

Introduction to Wage-Goods Model:

As in their old work, “Planning for an Expanding Economy” written in 1956, Vakil and Brahmananda attribute the prevailing poverty and unemployment to the existence of wage-goods gap. They, however, later defined their wage-goods gap with reference to the magnitude of poverty rather than with reference to magnitude of disguised unemployment as they did in their old work. Admittedly, poverty and unemployment are the two most pressing problems facing the underdeveloped countries today. Poverty is defined as living by households below minimum level of subsistence or real income.

According to Vakil and Brahmananda, to remove this poverty it is essential to increase the aggregate supply of wage goods. Unless and until the wage-goods gap is bridged, poverty will not be eliminated. In an article published in 1976, Dr. Brahmananda explained the causes of poverty as – “Poverty in 1975-76 could have been eliminated if the aggregate supply position in regard to basic wage-goods was higher, let us say, about 25% to 30%, and poverty would not raise its ugly head, if from 1975-76 onwards, each year our aggregate supplies of these goods would be growing at the same rate as our population would be growing. Thus, there is a basic wage-goods, gap in the economy which explains poverty.”

Components of Wage Goods Model:

It is useful to note what are the components of wage goods whose output expansion is stressed in the wage-goods strategy.

According to Brahmananda, they are:

(1) Food-grains; Cereals, Pulses,

(2) Milk and Milk Products,

(3) Edible oils,

(4) Fish, Eggs and Meat,

(5) Sugar and Sugar Products,

(6) Fruits and Vegetables,

(7) Spices,

(8) Tea,

(9) Coffee,

(10) Cloth,

(11) Matches,

(12) Soap,

(13) Salt, and

(14) Kerosene.

In addition to the above wage goods which are of the nature of private consumption goods, there are goods or services which fulfill minimum needs of the people and are generally provided at the collective level. These are “drugs for common use, medical and hospital facilities, minimum educational and library facilities, minimum utility services like water, electricity, roads etc., recreational services and facilities”. Besides these, there may be other wage goods in different regions depending upon the conventional and physiological-cum-nutritional requirements of workers.

Now, the question arises as to why there is a deficiency of wage goods in the economy. This is due to the fact that the capital stock or productive capacity designed and directed to produce wage goods is deficient. To eliminate poverty capital stock designed for the production of wage goods needs to be expanded. It may be noted that overall capital stock may be adequate but the capital stock in the specific form of productive capacity to produce basic consumer goods may be deficient. This is because all types of capital stocks cannot be used for the production of wage goods.

For instance, steel plants and machine making factories cannot be utilized for producing wage goods such as food-grains, kerosene oil, cloth, sugar, etc. In this connection economists generally draw distinction between capital in “putty” form and “clay” form. While putty capital is generalised form of capital which is capable of being used to manufacture all types of goods, that is, capital goods, luxury goods and basic wage goods, capital in a clay form is suited to the production of specific goods for which it is designed.

Thus, according to Dr. Brahmananda, “So long as capital is in a putty, all-purpose suited form, it can be directed towards creation of any sort of specific capacity built when once putty capital becomes capital goods in the form of factories, projects like mills, machinery, plants, mining and power stations and transport networks, it partakes “the nature of clay, fit for a particular purpose.”

It is only the stock of wage goods and the raw materials and accessories used in the production of these wage goods that represents putty capital or generalised capital because “if stocks of wage goods exist, labour power can be purchased and deployed for whatever specific capacities are needed in the country” We can represent the argument of Brahmananda in the following type of production process –

Wage Goods → Labour Employment → Capital → Wage Goods

This means that if wage goods are somehow made available, they can be used to employ labour for producing capital. If the new capital is designed to manufacture wage goods, the growth process can be started which will become cumulative and self-sustaining. The general argument of most modern economists is that for providing productive employment to the workers and to raise their productive efficiency and thereby accelerate the rate of economic growth, it is the deficiency of cooperating factors such as capital equipment, machines, cement, etc. which stand in the way. Vakil and Brahmananda hold this generally held view as quite fallacious since, according to them, this is based upon the assumption that adequate quantities of wage goods are already available.

Thus Vakil and Brahmananda lay greater stress on wage goods (i.e., liquid or circulating capital) than fixed capital in the growth process of the economy and for eradication of poverty and unemployment. “If only sufficient quantities of real liquid capital were available, the labour force can be diverted towards the manufacture of the tools and other equipment.”

It follows from above that, according to Vakil and Brahmananda, for removal of poverty, promotion of economic growth or capital accumulation alone is not enough. “The way out of poverty is, therefore, to pay immediate attention to making good the capital gap in respect of wage-goods capacity. This, in its turn, would imply drastic alteration in the pattern of investment in the economy.”

Disguised Unemployment and Wage-Goods Model:

Not only does the removal of poverty but also the eradication of disguised unemployment require the need for the expansion of basic wage goods. Vakil and Brahmananda take it granted that a huge amount of disguised unemployment exists in Indian agriculture and to eradicate it they propose a strategy of withdrawing the disguised unemployment from agriculture and using the wage goods surplus left behind by them.

They recognise that there will be leakage of wage goods in the process of withdrawal of disguised unemployed. They propounded in this connection a consumption multiplier or wage goods multiplier. In their scheme the disguised unemployed can be productively employed in capital construction works provided the additional supplies of wage goods are made available. They will produce those kinds of capital goods which will be used for manufacturing wage goods. In this way productive capacity designed for the production of wage goods will increase which will set in motion a cumulative process of growth in employment and output.

As a matter of fact, according to them, poverty and disguised unemployment are not two different problems; they are the two aspects of the same problem. Further, the solution of the problem of poverty as well as of disguised unemployment lies in raising the supply of wage goods. To quote Brahmananda, “Granted the existence of disguised unemployment, its eradication becomes conditional upon additional supplies of wage goods; for their employment in full-bodied productive capacity would create additional demand for such goods, unless the system is able to procure these wage goods additional employment will not be stabilised. Additional supply of wage goods leading to an improvement in per capita real income in terms of wage goods and/or in the real wage rate is the mechanism by means of which unemployment gets eradicated. Poverty in terms of inadequate supplies of wage goods is the barrier to full employment or fuller employment. In fact, there are no two problems like poverty and unemployment; there is only one problem—inadequate supply of wage goods.”

In the wage-goods model of Vakil and Brahmananda “the rate of growth of real income is determined by the proportion of savings to income and the portion of such savings devoted to the expansion of the wage goods sector.” It follows, therefore, that in order to accelerate the increase in the capital stock (or productive capacity) designed and directed to produce wage goods the proportion of saving to national income must be raised.

Given the capital-output ratio, the greater the rate of saving, the greater will be the rate of investment or capital accumulation. To raise the proportion of saving to national income, Vakil and Brahmananda’ recommended an increase in the rate of interest especially on bank deposits, fiscal incentives to those who are in a position to save and check on inflation or rising prices as they reduce the value of money and adversely affect the propensity to save. But, according to wage-goods model, to achieve faster rate of growth of employment and real income increase in the rate of saving is not enough. The pattern of investment must also be oriented towards building of capital stock designed for the production of wage goods rather than building capital stock in the form of heavy industries.

Wage Goods Strategy Further Developed and Modified:

In recent years Brahmananda has further developed and modified his wage goods model and development strategy thereof. He now calls his strategy as the “Extended Wage Goods Strategy” for he now includes in his priority sector what he calls ‘integrated wage goods complex’ not only the wage goods but also those capital goods which are required for the production of wage goods. To quote him, “Since not all capital goods (machinery and plant, tools and raw materials) are directly and/or indirectly but necessarily involved in the production process of wage goods, priority in development of capital goods has to be assigned to those capital goods whose supply (and/or production) leads to the production of wage goods.”

It is therefore clear that Prof. Brahmananda later realised the importance of capital goods and modified his model in the light of the criticism levelled against his earlier model that it was based on simple type of production process which considered that only labour is required for production of wage goods or capital goods. Thus, the modification made by him is in the right direction and makes his model more consistent and realistic.

In order that not only the growing population but also the existing unemployed and disguised unemployed are provided with employment, the extended wage-goods strategy suggests that the integrated wage goods complex (that is, basic wage goods and capital goods required for their production) should grow at a much higher rate than population. Accordingly, in the development strategy a very high priority must be accorded to the investment in wage goods complex.

Real Income Multiplier:

Besides in the wage-goods model, real income multiplier plays a significant role in the process of economic growth. It may, however, be noted that Vakil-Brahmananda’s concept of consumption multiplier has undergone some change in recent years. While their old concept of consumption multiplier expounded in their earlier work “Planning for an Expanding Economy was defined with particular reference to the removal of disguised unemployed from agriculture they have now put forward a concept of multiplier which relates the increase in the supply of wage goods to the increase in real income. In a later econometric study, Dr. Brahmananda found that Rs 100 worth of increase in the supply of wage goods leads to an increase in real domestic product (national income) equivalent to more than Rs 300. There is a stable multiplier.”

This has, therefore, been called consumption-real income multiplier and is an important factor in the determination of the magnitude of real income in the economy. This multiplier works on account of the fact that net productivity or output per unit of labour employed far exceeds the amount of wage goods consumed per unit of labour.

The surplus of wage goods s obtained can be further used to provide more labour employment to yield more output. “There is thus a multiplier process in regard to supply of output, the value of the multiplier being dependent upon the fractional excess of the net output efficiency of labour over and above the portion contributing to meeting the wage goods requirements of performance of labour.”

Let us briefly state the wage-goods model of development:

1. The poverty and unemployment exist because there is a wage-goods gap.

2. It follows from first proposition that for solving the problem of poverty and unemployment, expansion in the supply of wage goods is required.

3. To secure a rapid increase in the supply of wage goods, capital stock (or productive capacity) designed for the production of wage goods must be expanded. In other words; agriculture, other wage goods industries and capital goods needed for production in them must be given topmost priority in the investment pattern.

4. To enlarge the capacity to produce wage goods, proportion of saving to national income should be raised and a relatively high proportion of national saving should be invested in wage goods complex.

5. The importance of increase in the capacity to produce wage goods is enhanced because of the working of consumption-real income multiplier.

Arguments in Favour of Wage-Goods Strategy:

Many arguments have been given in defence of wage-goods model as compared to Mahalanobis’ Heavy Industries model of growth.

Firstly, given the investment resources, rate of economic growth will be faster if a high priority is given to the wage goods sector in the pattern of investment. This is because capital-output ratio is much lower in wage goods industries, especially agriculture, than in basic heavy industries sector. It has been contended by Dr. Brahmananda that within the framework of heavy industries model we cannot achieve a growth rate higher than 4% given the saving and investment rate of about 15% because of the high capital-output ratio in the heavy industries. But, according to him, if we make a shift to wage-goods model, the achievement of a higher growth rate becomes possible because of lower capital-output ratio in wage goods sector.

Secondly, the implementation of the wage-goods model will not involve much foreign exchange requirements both for building the wage goods capacity and for current purposes of using the capacity to produce wage goods. As a result, as compared to the Mahalanobis heavy industry strategy, the balance of payments gap in ‘wage-goods bias’ development strategy would be quite negligible.

Further, another merit of wage-goods model of development which was pointed out was that the wage-goods industries such as agriculture, cotton textile, sugar had a large export potential. Their products tend to have a large foreign demand. Thus, with the expansion of exports on the one hand and low import requirements on the other, the wage-goods strategy will result in net earnings of adequate amount of foreign exchange which can be utilised for importing capital equipment required for building capital goods base needed for producing capital goods and materials for the expansion of industrial and agricultural sectors. In this way the adoption of wage-goods model will ensure the attainment of self-reliance in a short time.

Thirdly, the most important advantage of wage-goods model is that the high rate of growth of the agriculture and the related sectors under it would provide potentially increasing amount of wage goods or circulating capital. The expansion in supplies of wage-goods or circulating capital will enable us to provide employment to the open and disguised unemployed and will thus help in solving the problems of poverty and unemployment.

Fourthly, as the majority of the new workers getting employment following the implementation of the wage-goods strategy will be drawn from the poverty-stricken households, the wage-goods strategy will have a good income redistribution effect. It was thus claimed by Dr. Brahmananda that the wage goods strategy put forth by him would promote economic growth with social justice.

Lastly, the expansion of wage-goods sector, that is, agriculture will generate a large demand for the products of manufacturing industries. This will ensure rapid industrial development with proper linkage with agriculture. The manufacturing industries would obtain food-grains and raw materials from agriculture and in turn would feed latter with inputs and industrial consumer goods. It is here worth mentioning that Vakil and Brahmananda, like Ragnar Nurkse, believed that disguised unemployment in labour-surplus developing countries contained saving potential in the form of wage goods.

By withdrawing the disguised unemployed people from agriculture, some amount of wage goods can be released for providing productive employment in the creation of capital assets (that is, in the investment sector). But Vakil and Brahmananda thought that the surplus of wage goods so released would not be sufficient to provide employment to all the potentially available labour force. Therefore, they also emphasised an increase in the production of wage goods, especially food-grains, so as to fill in the wage-goods gap and thus to achieve full-employment conditions.

The most important kind of wage goods are food-grains which are the product of agriculture and for which income elasticity of demand in the less developed countries is very high. Therefore, the approach to unemployment which visualises wage goods gap as the cause of unemployment assigns a paramount role to agricultural development in the strategy of growth so that food surpluses are made available to the newly employed workers outside agriculture. That the growth in non-agricultural employment through creating capital assets under rural works programme or through the development of manufacturing industries (including the capital goods industries) depends upon the marketable food surpluses has long been recognised in development economics.

Development experience of Western capitalist countries as well as of socialist Russia shows that for growth of industrial employment, availability of food surpluses is an essential prerequisite, though the methods of mobilising food surpluses have been different in the capitalist and socialist countries. Whereas in today’s Western developed countries such as U.K., U.S.A. and France, required food surpluses were obtained through agricultural growth by adopting capitalist mode of production, in Soviet Russia collectivisation of agriculture helped a good deal in extracting food surplus for growth in industrial employment.

Critical Evaluation of Wage-Goods Strategy:

That the growth of non-agricultural sector depends on the availability of food-grains or wage goods is quite obvious. When people are employed in rural public works and in industries producing capital goods and consumer goods outside agriculture, there will be need for food to feed them. If food is not made available to them directly or through market mechanism, their employment cannot be sustained. It may be asked even when unemployed they must be consuming food to make their living possible and therefore no extra food would be required when they are given employment.

That is, whether employed or unemployed people must consume food in order to live. However, when employed and paid wages for their work, they would definitely increase their demand for food, income elasticity of demand for food being quite high in underdeveloped countries. If more food is not forthcoming pressure of demand would push up prices of food-grains which will result in the redistribution of food-grains. It is thus clear that the supply of food-grains is an important bottleneck in the way of expansion of employment outside agriculture. Thus, Prof. Vakil and Brahmananda’s stress on wage goods as an important factor in determining employment outside agriculture is quite proper.

If b stands for food output per person employed in agriculture, w for consumption of food per person in agriculture, then food surplus per man employed in agriculture will be (b-w) and if is E₁ the total number of persons employed in agriculture, then the total food surplus will be (b-w) E₁. Now, the magnitude of this (b-w) E₂ will determine the generation of employment opportunities outside agriculture. If we designate employment outside agriculture by E₂ then we can express employment outside agriculture in the following functional form–

E₂ = f(b-w)E₁

In other words, viewed in this way, employment outside agriculture depends upon the food surplus in the agricultural sector. And the food surplus in agriculture depends upon the productivity per head (b) in agriculture and the consumption per head of the persons engaged in it. If productivity per head (b) in agriculture is increased substantially, opportunities of wage-employment outside agriculture can be expanded rapidly.

However, the assertion by Vakil and Brahmananda that the growth in employment solely and exclusively depends upon the supply of wage goods and that the capital goods (that is, heavy industry products) play no important role in the creation of employment opportunities is open to question. Under adequate organisation and entrepreneurial ability as well as optimum institutional forms, two important bottlenecks, namely, capital goods bottleneck and wage goods bottleneck are faced in creating opportunities for productive employment.

For expansion in productive employment both these bottlenecks have to be overcome and to emphasise the breaking of one bottleneck, while making no attempt to tackle the other, is an unrealistic approach to the employment problem. Wage goods are required to meet the demands of the newly employed people, but if some people are to be employed in productive activities in the very first instance, they are required to be equipped with some capital goods.

Further, for the production of wage goods themselves, capital goods are required. That is, labour is to be equipped with capital goods to produce wage goods. Professor Dantwala rightly points out that, “It is a mistake to consider capital goods and wage goods as exclusive and unrelated categories. Anyone who studies the composition of inputs needed for transformation of traditional agriculture should be able to appreciate the interconnection between the two.”

Thus, development strategy for rapid expansion of employment has to be such as will envisage the increase in production of both wage goods and capital goods. Thus, to talk of wage goods versus capital goods is a false issue and an unrealistic approach to the problem of employment since both are needed to generate employment; capital goods are required to make the employment productive and wage goods are needed to feed the workers provided with new employment, that is, to sustain their employment. To say this, however, does not imply that all capital goods industries should be necessarily developed at home and given higher priority in the allocation of resources. Which specific capital goods should be produced at home and which be imported from abroad should be decided on the basis of resource endowments and comparative advantage conceived in the dynamic context.

Further, it needs to be emphasised again that crucial factor in the generation of employment opportunities is the production and use of appropriate types of capital which aid labour in production rather than displace it. Thus, the use of appropriate technology for production is as important as the accumulation of capital if employment opportunities are to be increased and poverty eradicated. In other words, form of capital is as important as its amount.

Moreover, in view of the limited employment potential of large-scale industries using capital-intensive technology, if a development strategy is to generate sufficient employment opportunities, agriculture and rural industries must play a leading role and be given higher priority in the pattern of investment, for it is in the agriculture and rural industries that vast employment potential exists. Industries should play a supporting role to the development of agriculture, i.e., industry should produce such capital goods and other inputs such as fertilizers, cement, pesticides that are required for the growth of agriculture.

Thus, whereas, in the development designs of Western countries as well as of Soviet Russia, agriculture played a supporting role to urban industrialisation, in India with surplus labour industrialisation must serve the needs of agricultural growth. Thus, if for generation of employment opportunities agriculture is to constitute the main thrust, it is the basic and capital goods needed for the expansion of agriculture such as irrigation facilities, fertilisers, HYV, improvement and development of land that need to be given a high priority.

However, the wage-goods approach to employment, as enunciated by Vakil and Brahmananda, has not considered the creation of employment opportunities in wage-goods industries themselves, especially in agriculture. Emphasis on agricultural development in wage-goods approach has been laid for increasing the supply of wage goods so that they can be used for employment generation in non-wage goods sector, especially the rural public works or accumulation of capital.

Professors Vakil and Brahmanada in their proposed growth strategy had visualised withdrawing disguised unemployed from agriculture rather than creating employment opportunities in agriculture itself. That the problem of unemployment and underemployment or disguised unemployment in agriculture can be solved through agricultural growth itself, if proper strategy for agricultural development is adopted, was ignored by them.

In our view, in over-populated and agriculturally backward developing countries like India, agriculture can still absorb more labour if appropriate technological and institutional changes are brought about. Thus, agriculture is to be given high priority not only because it will yield wage goods which are badly needed for the expansion of non-agricultural employment but also because it is agriculture which, if proper strategy is adopted, contains immense potential for the absorption of labour in productive employment. Therefore, a great weakness of the strategy proposed by Vakil and Brahmananda is that it ignores the need for bringing about appropriate technological and institutional changes to generate enough employment opportunities in the agricultural sector itself.

Further, Vakil and Brahmananda’s strategy of employing labour in public works or in constructing other forms of capital is based upon a simple production process which assumes that labour alone can produce capital goods. This is far from the prevailing situation in the real world. Labour with bare hands can do little. Extra capital equipment and materials are required to employ labour in capital creating works. This necessitates a more elaborate approach to the growth of employment in developing economies, involving proper balance between wage goods, labour employment, capital goods and materials.