WAGE GOODS MODEL

The Wage-Goods model is a theory propounded by C.N.Vakil and P.R.Brahmananda which

aimed at the reduction or eventual eradication of poverty and unemployment. But to understand
the Wage-Goods model, one must understand the circumstances that brought about the need
for such a theory.

After independence, India, like most other underdeveloped/developing countries, faced

the problems of Unemployment and Poverty. The leaders of the nation decided to make it their
task to eradicate these problems by the implementation of policies. These planned policies had
very broad goals and aimed to achieve those goals, or at least a part of it, in a set amount of
time, which was decided to be 5 years and were thus called​ The Five-year Plans​. The second
Five-Year Plan was based on the Mahalanobis model, an economic model developed by P.C
Mahalanobis, a statistician by practise and physicist by training.
The economic model attempted to allocate capital resources among the different sectors
in a way to maximise long-run growth and through it, eliminate unemployment and poverty. The
model suggested that, to attain growth, the economy had to eliminate imports and to create
substitutes internally. This would be achieved by the aforementioned method of allocating
capital resources to the industrial sector first and then to the consumer sector. This would then
ensure that the country could substitute imports by first producing capital that produces
industrial and consumer goods. P.C.Mahalanobis was inspired by the Soviet Nations that relied
on heavy industrial development to fuel their economic growth and modeled his theory around
their example.
There was a lot of criticism against this model, the most sound of which was the
Wage-Goods theory, developed by Vakil and Brahmananda. Their argument was that, if there
are low levels of consumption(which was the case in India at the time), the productivity of the
workers depended upon their consumption. Thus, they advocated for the production of
wage-goods, a term which referred to the goods that a worker with wages might buy. They
usually include basic necessities such as:
● Food grains
● Milk and milk products
● Sugar
● Fruits and Vegetables
● Cloth, and more such necessities
In addition to these wage-goods of private consumption, existed goods that fulfill the minimum
needs of a collective, such as education, healthcare and road infrastructure.

The Wage-Good model encouraged investment of capital resources in the production of

wage-goods, which could then be used to employ workers to develop and produce more
wage-goods producing capital, which would then be used to produce wage-goods to create a
self-sufficient cycle of growth. This was however only possible in the early stages of economic
growth and development. And while there may be enough capital resources in an economy, not
all of it may be used to produce wage-goods. For example, the machines at a steel plant may
not be suitable for the production of wage-goods like food or clothing.
Economists thus differentiate capital based on what they can be used to produce. These broad
and informal categories on which they are divided are capital in “putty” and “clay” form. Putty is
moldable and can thus produce any good, while clay isn’t and is restricted to the production of a
specific good. Dr.Brahmananda proposes the use of such “putty” capital to produce wage-goods
which will help with creating more capital goods, which can, in more later stages of the
economy, be put to specific use, giving it the nature of “clay”, fit for a particular purpose.

Vakil and Brahmananda viewed poverty and unemployment as aspects of the same problem,
and wished to eliminate deeper problems such as disguised unemployment through the same
method of supplying wage goods. They understood that the disguised unemployed could be
used more productively in capital-construction works if additional wage-goods are made
available. Since disguised unemployed work little in their usual job, their demand for wage
goods is lesser too, but if they were used more productively in full-bodied jobs, their demand for
wage-goods would rise too. Therefore, to stabilise the employment in a country, it is necessary
to increase the supply of wage-goods. Additional wage-goods in the economy reduce its price,
leading to an increase in the real income of the workers in terms of wage-goods, and is the
mechanism by which unemployment is eradicated. Inadequate supply, according to the duo, is
the barrier to full/fuller employment. In Dr.Brahmananda, there weren’t two separate problems
like poverty and unemployment, just one- inadequate supply of wage goods.

Thus, the wage-goods model was raised in direct competition to P.C Mahalanobis’ model for
heavy-industrialization. The wage-goods theory took into account the workers’ productivity and
consumption and didn’t equate capital goods investment in capital producing industries to
economic growth like the Mahalanobis model did, instead creating a self sustaining growth
model for the early stages of an economy.