Shadow prices and markets: Feasibility constraints: foreign exchange and shadow wages

Abstract

A prerequisite of a theory of planning is an identification of the nature of the State and of the government. The planner, to whom much of planning theory is addressed, is part of a political machinery and is constrained by a complex structure within which he has to operate. Successful planning requires an understanding of the constraints that in fact hold and clarity about precise areas on which the planners in question can exercise effective control. The limits of a planner's effective control depend on his position vis-a-vis the rest of the government as well as on the nature of the political, social and economic forces operating in the economy. This paper is concerned with an analysis of some aspects of these inter-relationships in the specific context of project appraisal and benefit–cost evaluation. In section 1, the problem is posed. In section 2, the OECD Manual of Industrial Project Analysis , prepared by Professors Little and Mirrlees (1969), is critically examined in the light of the approach outlined in section 1. In section 3, the approach is illustrated in the specific context of fixing a shadow price of labour in benefit–cost analysis. SPHERES OF INFLUENCE AND CONTROL VARIABLES For any planning agent the act of planning may be viewed as an exercise in maximizing an objective function subject to certain constraints. In the absence of non-convexities it is relatively easy to translate the problem into a framework of shadow prices.