INDEX

(1) Introduction

(2) The Capitalist Sector

(3) The Subsistence Sector

(4) Assumption

(5) Movement of labour

(6) GRAPHICAL REPRESENTATION

(7) End of growth process

(8) Critical Review of the Lewis's Model

 LEWIS

THEORIES
 Sir William Arthur Lewis

(23 January 1915 – 15 June 1991)

INTRODUCTION

• Prof. William Arthur Lewis

'Economic Development with Unlimited Supplies

of Labour"

Published in 1954
• Lewis divides the economy in an underdeveloped
country in two sectors namely the Subsistence
sector and the capitalist sector.

• The "Dual Sector Model" is a theory of

development in which surplus labor from
traditional agricultural sector is transferred to the
modern industrial sector whose growth over time
absorbs the surplus labour, promotes
industrialization and stimulates sustained
development.
 The Capitalist Sector

The manufacturing sector of the economy.

• Lewis defined this sector as "that part of the

economy which uses reproducible capital and
pays capitalists thereof".

The use of capital is controlled by the capitalists,

who hire the services of labour.

• It includes manufacturing, plantations, mines

etc.

• The capitalist sector may be private or public.

• The capitalist manufacturing sector is

characterised by

* Higher Wage Rates

* Higher Marginal Productivity

* And a Demand for more Workers.

• The capitalist sector is assumed to use a
production process that is Capital Intensive, so
investment and capital formation in the
manufacturing sector are possible over time as
capitalists' profits are reinvested in the capital
stock.
 The Subsistence Sector
> The agricultural sector of the economy.
• "that part of the economy which is not using
reproducible capital".
• It is the indigenous traditional sector or the
"self employed sector".
• The per head output is comparatively lower in
this sector and this is because of lack of capital.
• In the model, the subsistence agricultural sector
is typically characterized by
• Low Wages
• An Abundance of labour
• Low Productivity through a labour-intensive
production process.
• Improvement in the marginal productivity of
labour in the agricultural sector is assumed to be
a low priority as the hypothetical developing
nation's investment is going towards the physical
capital stock in the manufacturing sector.

Assumption
• The model assumes that a developing economy
has a surplus of unproductive labour in the
agricultural sector.

• These workers are attracted to the growing

manufacturing sector where higher wages are
offered.

• It also assumes that the wages in the

manufacturing sector are more or less fixed.

• Entrepreneurs in the manufacturing sector

make profit because they charge a price above the
fixed wage rate.

• The model assumes that these profits will be

reinvested in the business in the form of fixed
 capital.

• An advanced manufacturing sector means an

economy has moved from a traditional to an
industrialized one.

Capitalist-sector Subsistence-sector
"Modern sector, industry" "traditional sector, agriculture"
Use capital Does not use capital
Employes workers Use family labour
Profit oriented (wage=MP) Wage not equal to MP

Surplus Labour

Surplus production of food

W. Arthur Lewis, 1958

 Movement of labour
• When the capitalist sector expands, it extracts or
draws labour from the subsistence sector.
• This causes the output per head of labourers
who move from the subsistence sector to the
capitalist sector to increase.
• Since Lewis in his model considers
overpopulated labour surplus economies he
assumes that the supply of unskilled labour to the
capitalist sector is unlimited.
• This gives rise to the possibility of creating new
industries and expanding existing ones at the
existing wage rate.
• The capitalist sector gives a slightly higher wage
than the subsistence wage in order to compensate
labour for the friction of moving and induce
labour to leave the traditional way of life.
• This wage is called the 'Subsistence Plus Wage
and it is according to Lewis, usually 30% higher
than the subsistence wage.

GRAPHICAL REPRESENTATION
OF THE THEORY

We is the wage rate fixed in the capitalist sector. It is

higher than W which represents the institutional wage.
The wage in the capitalist sector has to be higher than
the instructional wage because only such higher wage
can attract labour from the subsistence sector. At first;
ON-I labour is employed. This will lead to the
generation of surplus equal to AMIS, after the wages at
the rate W have been paid.

According to Lewis this surplus AMIS will be

reinvested either in old type of capital or may even be
used to improve the existing techniques. All this will
result in marginal productivity curve of labour moving
M2 M2. Now more labour at wage. We can employee,
ON2 amount of labour will now be employed. More
surplus will then be generated. It would be reinvested.

Marginal productivity of labour curve will shift to M3

M3 more labour can now be employed. Still more
surpluse will be generated and re-invested and so on.
The process of transfer of labour from the subsistence
sector to the capitalist sector will continue for some
time till some obstacles, hindering this transfer appear.
• It is worth mentioning that in Lewis Model, the
rate of accumulation of industrial capital and,
therefore, the absorption of surplus labour
depends upon the distribution of income. With the
aid of classical assumption that all wages are
consumed and all profits saved, Lewis shows that
the share of profits and therefore rate of saving
and investment will rise continuously in the
modern sector and capital will continue to be
expanded until all the surplus labour has been
absorbed. Rising share of profits serves as an
incentive to reinvest them in building industrial
capacity as well as a source of savings to finance
it.
 End of growth process
▸ The process of economic growth is linked to the
growth of capitalist surplus, that is profit. As long
as the capitalist surplus increases, the national
income also increases raising the growth of the
economy.
▸ The increase in capitalist surplus is linked to
the use of more and more labor which is assumed
to be in surplus in case of this model. This process
of capital accumulation does come to an end at
some point.
• This point is where capital accumulation
catches up with population so that there is no
longer any surplus labor left. Lewis says. that it is
the point where capital accumulation comes to a
stop can come before also that is if real wages rise
so high so as to reduce capitalists' profits to the
level at which profits are all consumed and there
is no net investment.

This can take place in the

following ways:
• If the capital accumulation is proceeding faster
than population growth which causes a decline in
the number of people in the agricultural or
subsistence sector.

• The increase in the size of the capitalist or

industrial sector in comparison to the subsistence
sector may turn the terms of trade against the
capitalist sector and therefore force the capitalists
to pay the workers/laborers a higher percentage of
their product in order to keep their real income
constant.

• The subsistence sector may adopt new and

improved methods and techniques of production,
this will raise the level of subsistence wages in
turn forcing an increase in the capitalist wages.
Thus both the surplus of the capitalists and the
rate of capital accumulation will then decline.

• Even though the productivity of capitalist sector

remains unchanged, the workers in the capitalist
sector may begin to imitate the capitalist style and
way of life and therefore may need more to live
on, this will raise the subsistence wage and also
the capitalist wage and in turn the capitalist
surplus and the rate of capital accumulation will
decline.
Critical Review of
the Lewis's Model:
(1) The assumption that disguised unemployment
exists in the agriculture sector has not been
accepted by many economists. Schultz, Viner,
Heberler and Hopper are a few of such
economists. According to them, the production in
the subsistence sector will be affected when
labour is withdrawn from it.

(2) Lewis ignored the cost involved in training the

unskilled worker transferred from the subsistence
sector. Even if it is obtained at a constant wage
rate, so for as its transfer from the subsistence
sector is concerned, the supply curve may slope
upwards so far as the capitalist, sector is
concerned if the cost of training rises as more and
more labour is transferred.

(3) When labour is transferred from the

subsistence sector share of agricultural output
falling to each one left in the agricultural sector
will go a rising. This means the institutional
wage will go on rising with every transfer and so
will be the wages paid in the capitalist sector.

(4) The model assumes that, besides labour, there

is unlimited supply of entrepreneurs in the
capitalist sector. This is not true in the case of
many of the underdeveloped countries.

(5) It is wrong to assume that a capitalist will

always re-invest their profits. They can to indulge
in un-productive pursuits. They can use their
profits for speculative purposes.

(6) It is also wrong to assume that landlords

always squander away their savings. The role of
landlords of Japan in industrialisation of the
country is well known.

(7) The model assumes that there already exists a

market for the industrial products in the country.
This is wrong. People of an underdeveloped
country may not be able to purchase the products
perturbed by the expanding capitalist sector.
Foreign markets, too, may not be available to the
capitalist sector in the beginning.
 REFERENCE

• J.W. Mellor - The Economics of

Agriculture Development