Limitations of the Marginal Productivity Theory
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Limitations of the Marginal Productivity Theory

Limitations of the Marginal Productivity Theory We already know very well the various limitations and criticisms of the Marginal Productivity Theory as a general principle of distribution. .With reference to its application to wages, we may repeat that the theory is true only under certain hypothesis such as homogeneous character of all labor, perfect competition, and perfect mobility of labor from employment to employment, stable rates of interest, rent and specified prices of the goods.

Limitations of the Marginal Productivity Theory

We already know very well the various limitations and criticisms of the Marginal Productivity Theory as a general principle of distribution. .With reference to its application to wages, we may repeat that the theory is true only under certain hypothesis such as homogeneous character of all labor, perfect competition, and perfect mobility of labor from employment to employment, stable rates of interest, rent and specified prices of the goods.

It is, however, a static theory. The actual world is dynamic. All the factors assumed to be constant are in fact constantly changing. Competition is never perfect; mobility of labor is restricted for various reasons; all labor is not of the same grade; remuneration to other factors of production does not remain constant; and the prices of the products of labor vary. All these changes modify the theory when applied to actual conditions. The theory, however, as an assertion of a tendency is true and is valuable in understanding the basic forces that determine wage rates.

In the real world, owing to the absence of the above assumptions, there is no single rate of wages that may be applicable to all labor of a particular type. Wages differ from place to place, from person to person and from employment to employment.

The following further points of criticism may now be noted:

(i) This theory has little applicability to reality. The labor is not perfectly mobile. Workers of the same skill and competence may not obtain the same wages at two dissimilar businesses.

(ii) Though the conditions of a large number of independent sellers are fulfilled for a few industries of all countries and for most industries of some countries, the employers usually combine to the disadvantage of the worker. It is a case of monopsony, i.e., one consumer and many vendors, the employers succeed in pulling downward the wages beneath the worth of the marginal net product of labor. If employees are also collectively organized, the wages may or may not be equal to the values of marginal net products of labor in the occupations or industries concerned. The wages are determined by the comparative negotiating strength of the two parties but will in no case exceed the value of the marginal net product of labor.

(iii) The market for goods is in general characterized by imperfect competition.

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(iv) The efficiency of workers is also reliant on aspects such as the value of capital and competent administration. These factors are outside the control of workers.

Conclusion

In short, the marginal productivity theory ignores the effect of wage changes on the supply of labor, bargaining strength and monopoly conditions, etc.

 

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