THE REAL COST OF LABOR, AND THE CHOICE BETWEEN CONSUMPTION AND INVESTMENT.

The aim of the article is to establish an efficiency condition for maximum output when consumption enters into the cost of production. To make the purpose potentially useful and valid, three assumptions are required. First, the marginal productivity of labor in the consumption goods industries must be zero. Second, it must be positive in the capital goods industries. Third, the government must be unable or unwilling to take steps to see that more labor can be employed without an increase in total consumption. The author's arguments have been developed with the Indian economy in mind. In the country the figures do not throw sufficient light because of the seasonality of employment. In many areas at least, the labor force is probably fully employed at planting and harvest time. But it seems to be widely agreed that substantial quantities of labor could be released, even at peak periods, with no effect on production if other measures were taken. It is important to note that the optimum or efficiency condition holds even if the aim is to maximize investment. It is important because the powerful desire of many leaders of opinion in most underdeveloped countries to develop as fast as possible may be interpreted to mean that capital equipment should grow, for some years at least, as fast as possible albeit subject to a tolerable minimum pattern of consumption growth.