11 Criticism Against Marginal Productivity Theory – Explained!

The marginal productivity theory is true only under certain assumptions which make the theory unrealistic and render it inapplicable to actual conditions.

It thus fails to explain the actual rewards earned by the factors of production.

We give below the various grounds on which the marginal productivity theory is criticized:

(i) It assumes that all the units of a factor are homogeneous, so that any one unit is as good as any other. This is not actually the case. All labourers are not alike; they are of varying efficiency; nor are all the units of land similar. The capital equipment is also of different types. Thus, we cannot talk of marginal productivity of a factor in general.

(ii) It is assumed that different factors are capable of being substituted for one another, so that, at the margin, it is possible to use a little more land or a little more labour or capital, etc. If this substitution is not possible, marginal productivity of the various factors may remain unequal. Actually, it is not always possible to substitute labour for capital and vice versa. Different factors of production are not close substitutes for one another.

(iii) It is also assumed that the amount of a particular factor that is used can be continuously varied, so that it is possible to apply a little more or a little less of the same factor. If this cannot be done, as is sometimes the case, the use of the factor cannot be pushed to the point at which its marginal productivity becomes equal to its cost.

(iv) It is assumed that the factors of production are mobile as between various uses. We know that land lacks mobility; nor are labour and capital perfectly mobile. Human package is said to be the least portable. If a factor cannot be moved from one use or employment to another, its marginal productivity in the various employments may remain unequal.

(v) The theory is based on the law of diminishing returns as applied to the organisation of a business. This means that, other things being equal, a disproportionate increase in the supply of any one factor increases total production at a diminishing rate. We know, however, that in manufacturing industries, the operation of the law of diminishing returns is held in check.It is under these assumptions that the reward of each of the four factors of production, viz., rent of land, interest on capital, wages of labour and profits of enterprise, tends to equal the value of its marginal net product. But these assumptions do not always hold good.

(vi) The marginal productivity theory has been criticised by Keynes, thus: One implication of this theory is that if employment is to be increased, wages should be lowered, so that more labour will be employed to make marginal productivity equal to the wage. This argument is fallacious. This may be true in the case of an individual industry or a firm. It cannot apply to the economy as a whole. The total employment in a country depends on effective or aggregate demand, and not on the level of wages.

(vii) According to marginal productivity theory, marginal productivity determines the reward of a factor of production. In other words, the two are independent. This is not really the case. One affects the other. The marginal productivity or efficiency of a factor also depends on the reward it gets. For example, in the case of labour, their wages determine their standard of living, which in turn determines their efficiency or productivity.

(viii) One common criticism is that a product is the result of the co-operative efforts of all the factors of production, and that it is impossible to separate the share contributed by each. This criticism advanced by Taussig and Davenport is obviously based on a misreading of the concept of marginal productivity.

The marginal productivity is not the net product solely due to the marginal factor. We merely impute that product to the factor on the margin of use. It is the net addition made to the total production by the employment of this additional factor, or deduction caused in it if this factor were withdrawn.

(ix) Another attack is made by Hobson. It is held that if any particular factor unit is withdrawn, the whole business will be so dis-organised that the loss to production will be much more than the productivity of the unit withdrawn. This criticism is also due to the wrong application of the theory.

The attention is fixed on a small business organisation and large units of factors. If we conceive of a large business and small units of factors, it will be clear that withdrawing a unit at the margin will not appreciably affect the productivity of the other factors.

(x) It is also objected that the theory assumes that the supply of a factor is fixed. In actual practice, the reward enjoyed by a factor does affect its supply. The theory approaches the problem from the side of demand only. It is thus a one-sided explanation.

(xi) It should be remembered that the theory is valid only under the assumption of perfect competition. In real life, competition is not perfect. Hence, actual rewards paid to the factors of production do not conform to their relative marginal productivities.

Moreover, this explanation of the determination of the shares of the various factors of production, in a capitalistic economy should not be regarded as justification, from the ethical point of view, of the system of distribution under such a system. The theory is essentially positive and not normative. It does not say that the reward of a factor according to marginal productivity is a just reward.

We may conclude in the words of Professor Samuelson that, “It (marginal productivity theory) is not a theory that explains wages, rents, or interest; on the contrary, it simply explains how factors of production are hired by the firm, once their prices are known.” For instance, it tells us how many workers an employer will employ at a given wage level. It does not tell how that wage level itself is determined.