Tag Archives: Discounted Marginal Value Product

Is MNREGS a significant cause of rapidly rising prices?

The Financial Express reports thus – ‘Rural wage hike pushing inflation, posing challenge for RBI’. It goes on to quote an Assocham spokesperson thus.

“Near 20 per cent annual increase in the wage inflation in rural areas is building up price pressures on food articles like cereals, rice and wheat, and is posing a big challenge for the Reserve Bank which is being called upon to cut the policy interest rates on Tuesday,” industry body Assocham said.

So what sense are we to make of this? Why would rural wages shoot through the roof in this manner? As far as I understand, there are two possible reasons. The first is that agriculture has seen such a tremendous productivity increase that marginal value product of a unit of labour has really gone up 20%. Alternately, as I explained out here, a steady rise in prices is possible only if inflationary policies greatly and steadily increase money supply.

And over the last couple of years, the Government of India, through various State governments, has really been flooding the rural markets with money through the MNREGS. So should we be surprised that rural wages have increased as much and as rapidly as they have? If we are, then it is time to revise our economics fundamentals. That such an outcome is inevitable could have been known right at the time of conceiving of a scheme like MNREGS. Why then are such policies being pushed? These and many other such tough questions are what we should be asking policy makers, but only an economically literate population can do so.

How many regulations is too many?

This article quoting the economist Raghuram Rajan (now tipped by some to be the next RBI Governor) brings up an important issue – that of regulation. Unlike Mr. Raghuram Rajan, I would argue in much simpler terms. The number of regulations is too many if their number exceeds zero. In simpler terms, every regulation is one too many.

What is regulation

The word regulation is one of these new-age words that had crept into our vocabulary in a rather insidious fashion. Today, most people look upon regulation as something necessary without which unbridled greed will result in undesirable outcomes. “Some regulation is necessary”, argue most people.

But what IS regulation? Very simply, it is a set of mandates or restrictions imposed by government on particular sets of citizens. Depending on the particular regulation, the set could become large enough to encompass all citizens. However, the important point to note that every regulation is an act of coercing one or more citizens with the aim of making them follow particular courses of action or preventing them from following particular courses of action.

So, regulation is coercion. Economically speaking, it is a form of violent exchange. From the perspective of economics, violent exchange lowers overall well-being. The victim of the violent exchange is forced to give up a more valued good for a less valued good or nothing at all. The recipient of the violent exchange clearly benefits, but the impossibility of comparing value across people leaves us with only one certainty. There is loss of utility and well-being to the person being coerced. The rest of it is plain wishful thinking.

Regulation and the labour market

This is especially true in the labour market where capitalists can only offer any factor of production its discounted marginal value product, i.e., the present value of its future marginal contribution to revenue. If capitalists are forced to pay more, they will employ less of the factor until the factor price equals its DMVP once again. The result of regulations in the labour market is, therefore, chronic unemployment.

All forms of labour regulation – minimum wages, mandatory contributions, gratuity, firing restrictions, child labour laws, etc. – raise the costs of employment. Therefore, they are all retrogressive. So, the only real solution is to repeal ALL these retrogressive regulations in the labour market. The only hurdle is the political one. The rest is just playing with words.