Criticism of Marginal Productivity Theory
The theory, explained above, 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 ground on which the marginal productivity theory is criticised :
(i) It assumes that all the units of a factor are homogeneous, so that anyone unit is as good as any other. This is riot 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 factor
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 price. (;.’) It is assumed that the factors of production are mobile as between various u. es. We know that land lacks mobility; nor arc 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. (I’) The theory is based on the law of diminishing retums as applied to the organisation of a business. This means that, other things being equal, a disproportionate increase in the supply of 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.
Iris-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. These assumptions do not always hold good. The theory has been criticised on other grounds too .. (I’il TIle marginal productivity theory has been criticised by Keyne thu : One implication of this theory is that if employment is to be increased, wages shoud be lowered, so that more labour will be employed to make marginal productivity equal to the wage. Thi argument i fallacious. This may be true in the case of an indiv idual industry or a firm. Hut it cannot apply to the economy as a whole. The total employment in a country depends on effective or aggregate demand. and on the level of wages. (I’iil Acc rdin to marginal productivity theory, marginal producti it)’ determines the reward of a factor of production. In other words, the two arc independent. Thi is not really the case. One affects the other. The mar 1031 productivity or efficiency of a factor also depends the reward it gets.