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Eco pro

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Eco pro

  1. 1. 1 ECONOMICS PROJECT ON CHOICE OF TECHNIQUES SUBMITTED TO: SUBMITTED BY: MR. HARVINDER NUPUR WALIA PROFESSOR, 8TH SEMESTER UILS, PU. SECTION A 38/10
  2. 2. 2 TABLE OF CONTENTS CRITICAL APPRAISAL OF CHOICE BETWEEN THE TWO TECHNIQUES..................................6 APPROACHES TO THE PROBLEM OF CHOICE OF TECHNIQUES...............................................7 USE OF ABANDONED TECHNIQUES OF ADVANCED COUNTRIES...........................................9 USE OF INTERMEDIATE TECHNOLOGY........................................................................................10 CONCLUSION.......................................................................................................................................11 BIBLIOGRAPHY...................................................................................................................................12 INTRODUCTION The choice of techniques refers to the type of FACTOR COMBINATION (i.e. Between labor and capital in particular) for any particular project or enterprise. This is to imply that a combination chosen for a particular project gives it a technique of production. The choice should be exercised in such a way that the objective function laid down in the plan is maximized. Therefore, the problem naturally becomes of ‘optimal choice of techniques.’ Certain dynamic considerations must be kept in mind by a planner, such as : 1. The chosen technique should not involve an unduly long gestation period.
  3. 3. 3 2. Technique should not conflict with any of the underlying objectives of the plan.  If growth is primary consideration, chosen technique should maximize saving and investment.  If maximization of current welfare of people is primary goal, chosen technique should contribute to immediate consumption. 3. Technique should help in creating wide ranging external economies so that the aggregate output is much greater than sum total of output of individual projects. While the urge to modernize nearly always prompts the adoption of capital intensive techniques, the existence of abundant and many time surplus labor justifies the use of labor intensive techniques. This creates a dilemma for the LDCs in the matter of optimal choice of techniques. To consider the usefulness of chosen technique, let us trace their relative merits and demerits. A. LABOUR INTENSIVE TECHNIQUES I. MERITS : i. Efficiency and lower production cost : These are more ‘efficient’ in sense that the cost of production would be lower, if more labor, which is a cheaper factor of production, and less capital is used. ii. Goals of planning : Where employment maximization is one of the goals of planning, adoption of labor intensive techniques directly contributes to it. iii. Income disparities and distribution : If reduction of income disparities is also one of the goals of planning, labor intensive techniques should be adopted, since output would get redistributed more in favor of labor in the form of wages, and very little would go oon in the form of rentier income like profits, rent and interest. iv. Saving on foreign exchange : Labor intensive techniques are important,as they require simple tools and machinery which are indigenously available and so, it saves considerable foreign exchange. v. Yield : these are quick yielding as they increase the supply of consumer
  4. 4. 4 goods and help in countering inflation in developing countries. vi. Production scale : labor intensive techniques imply production on a small scale as these units can be easily located in villages and small towns. This leads to decentralization and av aids the evils of factory system. II. DEMERITS : i. Static and short term: These are static and short term in nature. So, from a long term view, it can be a drawback. ii. Effect on LDCs : Continuous use of labor intensive techniques would imply that the technological revolution that characterized development in West would continue to elude LDCs. iii. Discriminatory distribution of income : Such techniques lead to redistribution of incomes in favor of those classes which have a low marginal propensity to save. Thus, employment would be maximized at the cost of capital formation. iv. No scope for learning higher skills : Higher ad improved skills cannot be learned when labor intensive techniques are in use. v. Lower productivity : such techniques result in lower productivity of labor which is directly proportionate to application of capital per worker. This reduces reinvestment surplus which leads to lower growth rate. B. CAPITAL INTESIVE TECHNIQUES I. MERITS : i. Advancement in technically backward economies : these techniques introduce highly productive improved and scientific methods of production the technically backward economies. ii. High Rate of Capital Formation : These ensure a high rate of capital formation by maxisingle the re investment quotient out of current incomes. iii. Skill Improvement : Skill labor of the labor in the LDCs improves when workers are made to work on Hi-tech plant and machinery. iv. Transforming traditional to moder : By creating a scientific temper among
  5. 5. 5 those who fall within the ambit of the modern factory system, the use of capital intensive techniques transforms the traditional societies into modern ones. v. High rate of capital formation and faster growth rate : Capital intensive techniques with high rate of capital formation which leads to faster rate of growth than under labor intensive techniques. It generates more employment in the long run. vi. Development of Overhead sectors : In LDCs, the development of social and economic overheads is possible only if capital intensive techniques are adopted in planning. Growth of this sector us very essential for the development of directly productive activities sector. II. DEMERITS: i. Conflict with resource endowments : Capital intensive techniques in LDCs come in conflict with their resource endowments. The super abundant labor fails to get absorbed, while scarce capital gets employed in a big way. ii. Aggravate the BOP position : Such techniques have relatively high foreign exchange component in terms of import of machinery, knowhow, spares etc. If these techniques are adopted on a large scale in LDCs, it will aggravate the already difficult BOP. iii. Rise in employment : the adoption of such techniques may lead to a serious social unrest due to rising unemployment. This is because the growth of employment opportunities will fail to keep pace with the growth of labor force. iv. Neglect to consumer goods : Such techniques emphasize more on capital goods sector to the relative neglect of consumer goods sector. This creates shortage of consumer goods which is bound to have inflationary effect in view of rapid rise in monetary demand in the economy. v. Income Inequalities : The large scale adoption of capital intensive techniques increases the share of profits in national income at the cost of share of wages. This further aggravates the inequalities in the distribution of
  6. 6. 6 wealth and income in the country. CRITICALAPPRAISAL OF CHOICE BETWEEN THE TWO TECHNIQUES An underdeveloped country with a vicious circle of poverty, low production, low income, low saving ratio and rapidly growing population must take measures to ensure a rapid rise in living standards. And obviously this cannot be attained without adopting capital intensive techniques of production. Capital intensive techniques , therefore, have a definite place in the development plans of an underdeveloped country. But at the same time, an underdeveloped country cannot afford to overlook the problem of mass underemployment and disguised unemployment on a large scale. In fact, what underdeveloped countries require is a judicious combination of the two techniques. They should employ capital intensive techniques for heavy and basic industries as well as for export industries and labor intensive techniques for agriculture and consumer goods industries. In other words, capital intensive techniques should be used for key and basic industries whose develope ment is a prerequisite for rapid economic growth. A major portion of the available capital, skill and foreign exchange resources will be earmarked for these industries. As such much of these resources will not be left for agriculture and consumer goods industries. Under these circumstances, there is no alternative but to use labor intensive techniques in such industries. The existing consumer goods industries should be left undistributed. But the additional requirements for consumer goods should be met by developing labor intensive techniques small scale and cottage industries. This would help in solving the problem of unemployment sand in attaining a fast expansion in the supply of consumer goods which is very essential to control the inflationary pressures which normally accompany fast growth. It may, however, be pointed out that adoption of labor intensive methods is suggested only as a temporary measure till the unemployment or underemployment disappears.
  7. 7. 7 Once the rapid economic growth eliminates unemployment, there would remain no justification for labor intensive techniques. This ultimately it is capital intensive techniques which would be used in both the capital as well as consumer goods industries. APPROACHES TO THE PROBLEM OF CHOICE OF TECHNIQUES A. Traditional Approach - The traditional microeconomic theory in the context of a private enterprise economy lays down that any entrepreneur seeking to maximize his profits would choose that method of production which minimizes the cost of production. In a situation of abundant labor and scarce capital, that factor combination would minimize cost of production where very large quantities of the scarce factor are used. Thus, assuming that labor is abundance and therefore cheaper, labor intensive techniques would maximize profits as well as output. It is obvious that the production function, together with the relative prices of factors, determines the choice of techniques. This logic is considered rational even for planned development at the macro level. The obvious techniques to adopt are the ones which maximize output from the scarce factor of production, say capital. In order to economize the use of scarce factor, make investments where the output capital ratio is the maximum or te capital output ratio is minimum. Thus, resources endowment determines the choice of technique. B. Maurice Dobb’s Approach According to Maurice, choice of technique should be dictated by its effect on growth rate. He is in favor of MRQ criterion of investment planning. According to Dobb, in short run, labor intensive choice of techniques would conflict with the growth of consumption as well as employment. But in the long run, capital intensive techniques, through a high rate of capital formation, would ensure a rapid growth of absolute consumption as well as employment. Thus, capital intensive techniques are seen as serving the interests of l0ong term growth, consumption as well as employment.
  8. 8. 8 C. AK Sen’s Approach Sen’s approach makes the choice of technique contingent upon the investment criterion chosen for investment planning (allocating investment resources). In his simple model, the economy is divided intro two sectors : the pre-capitalist, family based agricultural sector with large scale open and disguised employment, and the state owned advanced sector. The former is christened sector B (backward) and the latter sector A (advanced). The problem of choice of techniques relates to latter sector. Sector A just being started. Initially, the government’s investment capacity is limited by the surplus of output over consumption that can be generated in Sector B. If this surplus exists, the government can mobilize it for investment through taxation etc. Sector A is divided into two departments - department I producing capital goods and department II producing corn which is assumed to be the only consumer good. The problem is to choose between two alternative techniques of production, H and L, the former with a higher capital intensity thana the latter. Sen defines capital intensity as the number of man years required in department I to produce enough fixed capital to employ an additional worker in department II. If the criterion adopted for investment planning is that of capital turnover or social marginal productivity, that technique should be chosen which maximizes current output of consumer goods with a fixed volume of investment. From this angle, technique L (labor intensive) will be preferred to technique H (capital intensive). If on the other hand, the objective is to maximize re-investable surplus over consumption, technique H (capital intensive) will be chosen as against the technique L (labor intensive). Therefore, if the criterion is to maximize capital turnover or social marginal productivity, a relatively labor intensive technique (L technique) should be chosen. If it is intended to maximize the re-investable surplus, a relatively capital intensive technique (H technique) should be chosen. This theory is severely criticised as the assumptions of model, such as a single commodity like corn serving both as a consumption as well as investment good,
  9. 9. 9 assuming labor to be homogeneous factor, and considering capital labor ratio as a single index of techniques of production etc are unrealistic. Along with other approaches, Sen’s model does not not consider the case where choice regarding techniques may not be open because only one technique may be known and available then. CONCLUSION AS TO CHOICES OF APPROACH In each of the approaches discussed above, the solution lies in choosing either labor intensive or capital intensive technique. However, in reality the problem seems to be more complex. The requirements of higher current current output and employment, and of higher growth rate are important at the same time. So most of the underdeveloped countries have adopted a combination of different investment criteria involving a compromise between the opposing techniques of production in their investment policies. Over a wide range of activities like agriculture and consumer goods sector, labor intensive techniques should be adopted in LDCs with activities like social and economic infrastructure, heavy industries etch where only capital intensive techniques have to be adopted. Thus, there appears to be no escape from the choice of multiple techniques of production. As the economies grows and industries are started, there should be a planned and gradual transition to better and higher technique of production. At times, both capital and labor intensive techniques must co - exist, the former to dominate the capital goods sector and the latte to dominate the consumer good sector. USE OF ABANDONED TECHNIQUES OF ADVANCED COUNTRIES Obsolete and abandoned equipment is often available from advanced countries at a very cheap price. The techniques and equipment abandoned in advance countries are much superior to those employed in the underdeveloped countries, of course, barring the small modern sector which employs the most up-to-date techniques and equipment. There have been cases where backward economies have made use of obsolete equipment abandoned by advanced countries. In its early phase the Japanese textile industry used
  10. 10. 10 machinery discarded by the British textile industry. Israel and Argentina have also been importing used equipment of te advanced countries. No doubt, the discarded machines are cheap and of lower capital intensity, they involved high costs in terms of repeated breakable and constant repairs. USE OF INTERMEDIATE TECHNOLOGY The dilemma of a choice between capital intensive and labor intensive technology has led to some search for an appropriate technology or intermediate technology. The aim is to look for those techniques of production which combine in themselves the benefits of both more employment and higher productivity. The chef votary of the notion of intermediate technology is E.F. Schumacher, a German economist. According to him, the LDCs are essentially dualistic economies consisting of a modern sector using ‘high productivity technology’ and the non-modern sector using obsolete, low productivity technology. He says that the former sector may continue using the imported capital intensive technology since that part of the economy is not his concern. His problem is mainly helping the poor in the non modern sector, that is, bringing economic life outside big cities, in small towns and villages through the creation of millions of workplaces. According to him, some goods cannot be produced except with the highly sophisticated equipment. However, in the concept of intermediate technology, since the focus of attention are the poor, goods that are relevant for this class - clothing, building material, household goods, agricultural implements - can easily be produced with the help of simple equipment. The successful adoption of intermediate technology depends on he following conditions: a) Work places should be cheap and should not require high level of capital formation and imports; b) Work places should be created in such areas where majority of the people live and not in metropolitan cities where people tend to migrate; c) Production methods should be quite simple with facility to repair and maintain them at door step;
  11. 11. 11 d) Production should be based on indigenously available raw materials. The real problem with this notion is the development of appropriate techniques. In this connection, three possibilities of developing intermediate techniques: a) Transforming the existing techniques in the light of knowledge of the advanced techniques, which means improvement of existing technique. b) Adaptation of the advanced techniques so as to suit the local circumstances, including the availability and the type of fuel and power. c) The development of intermediate technology through research and experimentation. CONCLUSION The question of making an optimal choice of technology arises when, for a certain level of production, alternative technologies require more of some productive factors, but less of others. The optimum combination of resources, which is the same thing as the choice of technology, is an old problem in economics and has been fully discussed in the context of a static economy.
  12. 12. 12 In such an economy, the rule for choice is roughly, to use that combination of techniques in the various sectors which overall will employ productive factors in proportions as close as possible, to the proportions in which the resources are available. This is not inconsistent with using factors in different intensities in different sectors because optimum combination requires that resources make the same relative contributions to output in the various lines of production. The criterion for optimum choice is does not aim at maximization either of productivity of the employed labor force, the equipment used, or of any other particular resource inputs. Its objective is to maximize total output which can be obtained from all resources available in that country. Even with such an optimum allocation, it is possible to increased the productivity of any one factor ( say labor) employed n some particular lune of production, by choosing a different technology (say more capital intensive); this will however, necessarily involve a greater loss of output in other lines. Different technologies which use different combinations of labor, capital, plant and equipment and raw materials give rise to different income distributions which in turn lead to different rates of growth of saving and investment. Raising the rate of growth being an important objective in developing countries, the choice of techniques should take into account not only immediate contribution to output, but also the rate of growth of subsequent contributions to output. Any technology which creates greater favorable external effects would receive preference. BIBLIOGRAPHY a) Meier . G. M. (Eds.) : Leading Issues in Economic Development, Oxford University Press, New York, 1995. b) Misra. S.K. and V.K. Puri. :Economics of Development and Planning-Theory and Practice, 4th edition, Himalaya Publishing House, New Delhi, 1989.
  13. 13. 13 c) Gupta, K.R. : Economics of Development and Planning : History, Principles, Problems and Policies’ 2nd Edition. d) Taneja M.L et Myer, R.M. : Economics of Development and Planning.

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