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Limitations of Marginal Productivity Theory of Distribution

Here we discussed about what is marginal productivity theory of distribution and its Limitations in detailed.

Limitations of Marginal Productivity Theory of Distribution
Firstly, we understand the Concept of Marginal Productivity Theory of Distribution:
The marginal productivity theory of distribution seeks to explain how the national income is distributed amongst various factors of productions, it explains how the price or the share of each factor of production is determined. This theory known as the theory of factor pricing. The sum and substance of this theory is that the  price of a factor of production depends upon its marginal productivity, means a particular factor of production gets its reward according to the marginal contribution it makes to total output.
Now, we will discuss the limitations of marginal productivity theory of distribution one by one in detailed.
Limitations of Marginal Productivity Theory of Distribution:
The marginal productivity theory of distribution has been criticised on the following grounds:
  1. Unrealistic Assumptions: It has been argued that the theory makes too many assumptions which are hardly found to be applicable in real life and therefore, it is said that the theory has no validity. For eg- (a) The assumption of perfect competition is unrealistic because in practical life what prevails is neither perfect competition nor pure monopoly but a mixture of the two, that is 'monopolistic competition' or 'imperfect competition.' (b) The assumption that all the units of a factor of production are homogeneous is not correct. In actual practice, the units of a factor of production are heterogeneous. No two workers are equally efficient nor are two pieces of land equally fertile. (c) The assumption that factors of production are divisible and that it is possible to change the combination of the factors of production and substitute one factor for another is also not correct.
  2. Factor Proportion Difficult to Change: Professor Hobson has criticised the theory on the ground that it is difficult to change the proportion in which the factors of production are used. The proportions in which factors are used are determined by the technical conditions of business, the existence of fixed capital such as machinery, plant etc. For eg- there are many machines which require only one labourer, two would be uneconomical. We cannot vary the use of the factor, how can we determine its marginal productivity?
  3. Difficult to Measure Marginal Productivity: Economists like Davenport, Taussig, Carver and others point out that the production of commodity is the result of joint and co-operative efforts of the factors of production and that it is almost impossible to find out the separate share contributed by each other. Means, it is rather very difficult to determine the contribution of each factor in the total output.
  4. Ignores Supply Side: It has been said that the marginal productivity theory takes into consideration only the demand for the factors of production and completely ignores the supply side. The theory, is one-sides. It assumes that the supply of the factors is fixed. It approaches the problem from the side of demand only and ignores the forces of supply or assumes supply to be given and fixed.
  5. Not Possible to Measure Marginal Productivity: It has been said that under certain conditions, it is not possible to measure the marginal productivity of a factor. For eg- in a large scale enterprise the addition or withdrawal of a unit of factor can hardly have any effect on the total output. If an enterprise employs, say, 6,000 workers and produces say 13,000 units of a commodity, the addition of one extra worker to the existing labour force, i.e. 6000 + 1 = 6001 will hardly add any thing to the total output. 
  6. Factor - pricing affected by other Factors also: In real life, the reward of a factor of production is not exclusively determined by its marginal productivity. There are other factors which affect the problem of factor-pricing. That is, wage determination governed not only by the marginal productivity of labour but also by other factors like the strength of the trade unions, collective bargaining, wage legislation, etc.
  7. Takes Factor Reward as Given: The theory has been criticised on the ground that it does not exactly tell us how the reward of a factor of production is determined in actual practice. The theory takes the reward of a factor as given and explains how the employer equates the marginal productivity of that factor to the given reward. For eg- wage rate is taken as given or determined. Here, the employer simply equates the marginal productivity of labour to this given wage by employing a certain number of workers, means the theory states that the reward of a factor is determined by and is equal to marginal productivity of that factor, but it fails to answer the question as to how the price of a factor is determined.
  8. Factor Reward equals discounted Marginal Productivity: Professor Taussig points out that the price of a factor of production is not equal to its marginal productivity but it is equal to its discounted marginal productivity. The factors of production are to be paid their remuneration before the output produced by them is sold in the market. Here, the employer therefore, has to make arrangements to pay them their reward and he has to take a loan from the bank or other credit institutions and pay interest thereon. The employer, does not pay the factors according to the full value of their marginal productivity, but slightly less than this, that is, he deducts a certain amount from the marginal net product of a factor - this amount being dependent upon the prevailing rate of interest. The reward of a factor of production, tends to be equal not to its marginal productivity but to its discounted marginal productivity.
  9. Factor Reward Affects Marginal Productivity: According to theory, it is the marginal productivity of a factor that determines its reward, but the reward which a factor of production gets may also affect its marginal productivity. For example, a rise in the wage rate may enable the workers to improve and increase their efficiency and productivity. The reward of a factor and its marginal productivity are interdependent. The marginal productivity of factor affects its reward, but the reward of a factor may also affect its marginal productivity, both are inter-connected manually.
In spite of these shortcomings, the marginal productivity theory of distribution offers an apparatus which can usually explain the rewards of the various factors of production. The theory generalised to show how the prices of factors of production are determined in actual practice. Marginal productivity of a factor is one of the conditions which governs the remuneration of a factor.

Marginal Productivity Theory of Distribution
Limitations of Marginal Productivity Theory of Distribution
Unrealistic Assumptions
Difficult to Measure Marginal Productivity
Factor Proportion Difficult to Change
Takes Factor Reward as Given
Factor Reward equals discounted Marginal Productivity
Not Possible to Measure Marginal Productivity
Factor-Pricing affected by other Factors
Factor Reward Affects Marginal Productivity
Marginal Productivity Theory of Distribution - Limitations of Marginal Productivity Theory of Distribution.
Kinnari
Tech writer at NewsandStory
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