LAKSHMINARAYAN MODEL ON GENERATION OF EMPLOYMENT

The theory of employment of Prof. Sinha is an independent dogma in it own way of presentation and more conducive to the development of a developing economy.

Under historical perspective we find that the Classical and Neo-classical heritage combine the theory of employment with the theory of wages. Their dogmatic views on it conclude that the opportunities of employment can be enhanced by the process of cutting the margin of wage rate. Later, Keynes was opposed to this philosophy. He criticized the classical and neo-classical ideas of employment and warned that the policy of implementation of wage-cut is not always possible. To him, it is seldom operative in the organized sector. Keynes found it wrong and separated theory of employment from theory of wages. Employment is determined by aggregate supply and aggregate demand and wage by the size of employment and marginal productivity of labour, the latter is being a decreasing function of employment. The mantle of short period analysis restricted him to take the two theories to their logical footing.

According to Keynes, the generation of employment can be made possible through the use of the principle of effective demand which determines the equilibrium level of employment through the intersection of aggregate demand and aggregate supply function curves. Effective demand can be made more useful by the forces of investment …….. multiplier and this process will continue until the point of equilibrium is reached. Deficiency in the volume of affective demands is the main cause of unemployment in a country. He emphasized that nothing new in the approach of aggregate supply function. Only the shift in aggregate demand function will lead to the stage of high level of employment through more and more investment in the economy.

Prof. Sinha is an antagonist of Keynesian philosophy of employment and has criticized Keynes that his theory is not applicable in a developing country because the increment in aggregate demand function in that country is a hard task to stimulate it through the channelisation of forces of investment. Thus, according to him, ‘employment is determined by supply of and demand for capital. The extent supply of capital determines employment capacity of an economy. Demand for capital derived from size and composition of terminal output and technology chosen for it, determines the extent to which the existing employment capacity is put to use and new employment capacity is being created (Value and Growth, 1974, P.156)’. To support his viewpoint he has developed a model of wage-profit relation. r = Rⁿ√ 1 – w which shows the suitability of classical dictum. He calculated that ‘a fall in the wage rate would raise the rate of profit. If it be so, the rate of investment rises, effective demand increases and the volume of employment expands. Is there any reason why the rate of profit would not rise as a result of a fall in the wage rate? If the value of R (Standard Ratio) is reduced as a consequence of a fall in wage, the rate of profit may not rise. It may remain constant or it may fall according as the value of R is reduced less or more substantially. It is the demand-determined value of R, which is relevant in this context. He seached out that the fall in the value of R is caused by reduction in net output ( 1bid.P.157 ). He establishes a positive relationship between possibilities of creation of employment and the technology applied. It is more important for a developing economy than a developed one. ‘Rise in efficiency is urgent so that net out put per worker exceeds substantially the wage rate, which is low.

The capital labour ratio KP  / [ L ] in the investment function must rise. Once the right technology is chosen, the stock of capital goods must expand to absorb all the labour available. Rising rate of investment expands aggregate supply. Careful investment planning is required to see that every increase in aggregate demand is matched by corresponding expansion of aggregate supply, both income and capital multiplying effects of investment proceed evenly at each stage of development (1bid)’.

His model of employment generation is more superior than J.M. Keynes as well as A.C. Pigoue. If we make a comparison among all the basic models of them, we find :

Where N = Employment

D = Increase in effective demand

W = wage rate

qg = increase in income

I = Investment

K = Increase in Capital Stock

R = Standard Ratio

The Pigouvian equation stresses the point that the changes in money income, which are offset, by corresponding changes in wage rates will leave employment unchanged. On the other hand, Keynes pleads his viewpoint that employment is a function of increased demand with a change in wage rate. The major difference between these two models is that the former is related to changes in income and wage rate while the later is concerned with changes in effective demand and wage rate. In both of them W is common showing the nature of aggregate supply of labour in the economy. But Sinha criticized both the models on the ground that the increasing tendency in both macro variables ( D & Y ) in a developing economy is not possible due to lack of capital which is a main feature of the economy. Demand of Keynes and Income of Pigoue cannot be enlarged without the forces of R of Sinha.

Thus, on the basis of assessment of the classical, the neo-classical and the Keynesian philosophies of employment creation we find that Sinha model is more logical and suitable because earlier views had some lapses in their application. Mr. Sinha searched out those maladjustments and concluded that only wage-cut and effective demand principles are not enough to increase employment in the economy but the stock of capitals with right technology and careful investment would create more employment and purchasing power of the people. On balance, we must adjudicate that the theory of employment of Prof. Sinha is right in principles and also suitable in applicability in developing economy than any other predecessors of him.

BACK