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capital-output ratio. This is the well-known Harrod-Domar model of growth. In the absence of resources from outside, the economic system must generate econcaic surplus for capital formation through domestic savings. In this framework, the more the system succeeds in reducing consumption (or increasing saving), the higher the rate of growth. Anything that works against increasing savings, therefore, is considered bad. (It must be noted that this way of using the Harrod-Domar model is geared to developing countries. When the model first appeared as a theoretical innovation with developed countries in mind, its concern was to show that savings tended to exceed the ability of the system to invest.)
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Resources channelled into social security benefit are consumed. reason, social security is considered bad for developing countries desiring a higher rate of economic growth. The argument is that the same resources consumed through social security benefits could be used for adding to capital formation.
A variation of growth economics takes into account the existence of two different factors of production, namely, labour and capital. It usually postulates that the earnings of labour are entirely consumed while those of capital are entirely reinvested in capital formation. From this it follows that if society desires a higher rate of capital formation and a higher rate of growth, it is wise to make the share of wages in the aggregate output as small as possible. Given the size of the labour force, this means that the lower the wage rate, the better it is for the economy as a whole. It is only a short distance from this to the famous "belt-tightening" argument in favour of economic growth. The social cost that arises in the form of social protest in response to wage reductions, however, falls outside the framework of conventional economic analysis. The glorification of the lowest possible wages in the interest of highest possible capital formation through the highest possible profit share in national output rules cut any possibility that workers can set aside, any portion of their wages for savings or as contributions social security for their future use.
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The danger of macro-economics is that it often makes people forget that the economic aggregates like national output, capital stock, capital formation, labour force, and savings are not uniquely defined variables but appropriately adjusted sums of data at the micro-economic level of individual households and firos scattered over the geographical expanse of a national economy. Within each macrc- economic variable, enormous shifts and changes are always taking place even if its aggregative value remains constant. The dynamics of micro-economic processes are extremely important from the welfare point of view, and it cannot be assumed a priori that welfare relevant micro-economic changes are always sensitively reflected in the movement of a macro-economic variable. When a macro-economic variable changes as in the case of an increase in national income, there are always changes in the economic position of some micro-economic units. Whether a macro-economic change is good or bad from the welfare standpoint therefore depends on how this change translates into changes in the absolete and relative economic positions of various micro-economic units. As was seen above, welfare economics offers highly convenient "efficiency criteria" for this macro-micro relationship.
Micro-economics is a highly versatile approach to the exploration of all possible aspects of what firms and individuals can do in a perfectly self-regulating market economy. Unfortunately, the conventional uses of this part of economics have been full of biases against social security or any role of government in general. These biases stem from too literal an acceptance of the assumed "self-regulating market" as if this were а faithful approximation to the real economic system. However, awareness of differences and distances between the ideal type set up for analytical purposes and realities to which analysis is applied would open ways in which micro-economics could be very useful for a number of cases dealing with public policy. Micro-economics' objection to social security in a self-regulating market can be turned around for the support of social security in a real market which is far from perfectly self-regulating.
It is therefore useful to know how micro-economics argues against social security. Micro-economics does so by asking what social security does for its recipients and whether individuals through a free and rational use of opportunities available in the market system cannot do the same equally well. In the most general sense, social security makes resources available to individuals to enable them to meet the needs that exceed their current incomes. Situations in which needs requiring greater resources than the current incomes (including those where the current incomes drop to zero while living expenses have to be incurred for the customary standard of living) are not normal in social life.
Since rational
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