Criticism of the Theory of Disguised Unemployment
Criticism of the theory of disguised unemployment
The theory of disguised unemployment as a saving potential, put forward by Nurkse, has been subjected to the following criticism:—
1. It is said that full mobilisation of the saving potential would, no doubt, increase investment without reducing consumption. But there are practical difficulties in this mobilisation. People accustomed to agriculture do not take easily and kindly to industrial jobs. Being misfits, they indulge in absenteeism. The Indian labour is said to be a farmer by preference and a factory hand by necessity. But it may be said, against this argument, that the difficulty is not insurmountable. After a lapse of some period, the rural labour does get acclimatized to urban industrial centres.
2. It is said that the withdrawal of surplus labour from the farms leaves the farm output unaffected and their transfer to the capital goods sector would make a net addition to the capital stock. This creates an impression that disguised unemployment is a blessing in disguise and not a drag on industrialisation as it actually is. This is a misleading impression. Shifting of illiterate, ignorant and unskilled labour to capital goods sector cannot be expected to make any significant addition to the stock of capital goods. They can only be employed in labour-intensive projects which cannot be expected to produce modern machines in quantity and of quality which alone can accelerate economic development or rapid industrialisation. This surplus manpower can only be used in crude and rudimentary forms of capital formation such as clearing factory sites, doing some earth work or producing some raw materials for industries, i.e., jobs on the fringe of the industrial sector. It is said that it takes a machine to make a machine. But the disguised unemployed are a poor substitute for such a machine as can make a machine.
3. The assumption that the level of consumption remains constant is of a doubtful nature. When surplus labour is shifted to capital goods industries, their incomes will go up and the propensity to consume must rise. Who can stop it? (a) These people, before being shifted, were living close to the subsistence level of necessity and as soon as they can afford a bit, the pent up consumer's urge must burst; (b) The urban areas to which they have shifted are a consumers' paradise; all sorts of attractive articles at moderate rate press on consumers' choice. These centres are more conducive to strong propensity to consume than the rural areas where practically nothing is available. The propensity to consume is bound to rise and pressure for allocating resources to the consumer goods sector will increase and these resources could have been used in the capital goods sector for speeding up economic development.
4. In the course of industrialisation, it is very likely that the capital goods sector adopts labour-saving devices in order to enlarge the scale of production and reap the various economies of scale. This tendency will impose a limit to the ability of the capital goods sector to absorb fully and continuously surplus labour. Capital must grow much more rapidly than is assumed in this theory. On the other hand, population growth tends to outrun capital formation.
Hence, the theory of disguised unemployment as saving potential seems untenable and unhelpful. The ever-increasing population makes it impossible to increase net investment without reducing consumption.