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  • Economics Notes On – Lewis Model – For W.B.C.S. Examination.
    Posted on November 11th, 2019 in Economics
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    Economics Notes On – Lewis Model – For W.B.C.S. Examination.

    অর্থনীতি নোট – লুইস মডেল – WBCS পরীক্ষা।

    A number of economists attempted to analyse development in the context of a ‘labour-surplus economy’. These theories owe their origin to the celebrated work of Nobel Laureate Sir W. Arthur Lewis in 1954. An elaborate discussion of the labour-surplus economy is given by G. Ranis and John Fei in 1961.Continue Reading Economics Notes On – Lewis Model – For W.B.C.S. Examination.

    In 1954 Sir Arthur Lewis published a paper, ‘Economic Development with unlimited supplies of labour’ (The Manchester School), which has since become one of the most frequently cited publications by any modern economist: its focus was a ‘dual economics’ —small, urban, industrialised sectors of economic activity surrounded by a large, rural, traditional sector, like minute is largely in a vast ocean.

    With their acute material poverty, it is difficult at first sight to imagine how the overpopulated countries can increase their savings without great hardships. On the contrary, their surplus population on the land seems to offer a major unused potential for growth, waiting only for the ‘missing component’ of outside capital to assist them in the process.

    Moreover, their rapid rates of population growth lend themselves to calculations of aggregate capital requirements which must be made available if their per capita incomes are to be maintained or raised.

    Says Myint, “All in all, the drama of the poor countries struggling at the minimum subsistence level and the need for a massive dose of outside capital to break the interlocking vicious circles which hold them down to that level does not attain its full tragic grandeur unless viewed against the background of overpopulation.”

    An LDC is conceived to operate in two sectors:

    (1) A traditional agricul­tural sector, and

    (2) A much smaller and also more modern industrial sector.

    “Surplus labour” (or disguised unemployment) means the existence of such a huge population in the agricultural sector that the marginal product of labour is zero. So, if a few workers are removed from land, the total product remains unchanged.

    The essence of the development process in such an economy is “the transfer of labour resources from the agricultural sector, where they add nothing to production, to the more modern industrial sector, where they create a surplus that may be used for further growth and development.”

    In Lewis model the transformation process or the process of structural change starts by an autonomous expansion in demand in industry as a result of changes in domestic consumer tastes, in government purchases, or in international markets.

    The central point is that labour (here considered homogeneous and unskilled) shifts from agriculture into industry. The supply of labour from agriculture to industry is “unlimited” (i.e., completely elastic) at the given urban wage (about 30 to 50% higher than the rural wage), owing to the relative sire of the agricultural labour forces at the margin.

    The phenomenon is frequently labelled “disguised unemployment in agriculture”. Redundant supplies of unskilled labour to industry at existing wages hold down industrial labour costs. But higher demand and higher prices in industry result in higher profits.

    When these profits are ploughed back into industrial capital formation, demand for industrial output (both for consumption goods by newly employed workers and investment by capitalists) rises, causing further shifts of labour out of agriculture into industry.

    The process comes to a halt when agricultural productivity rises to a point where the supply price of labour to industry increases, i.e., a point at which agricultural alternatives of output and income are sufficiently attrac­tive to the would-be industrial workers to keep them in farming. In the absence of rural-urban differences in the cost of living, this occurs when the marginal product of labour in the two sectors are equal.

    Lewis postulates the existence of a subsistence sector with surplus labour and he sees in this the seed for the subsistence sector. One major charac­teristic of the capitalist sector is that it uses reproducible capital and that it produces profit.

    Since there is surplus labour from the subsistence sector, the capitalist sector draws its labour from the subsistence sector and it is assumed that as a result of rapid increases in population in already densely populated countries the supply of unskilled labour is unlimited.

    So capi­talists can obtain even increasing supplies of such labour at the existing wage rate, i.e., they will not have to raise wages to attract more labour. So, the capitalist sector can expand indefinitely at a constant wage rate for the unskilled labour.

    The actual (market) wage rate will be determined by earnings in the subsistence sector. But ‘earnings’ here means the average product and not the marginal one, in subsistence sector receives an equal share of what is produced.

    Lewis has assumed and made the point that capitalists will have to pay a margin of about 30% above average subsis­tence pay, because the surplus workers need some incentive to move and in any case part of the difference is needed to compensate them for the higher cost of living in urban areas.

    Another point to note is that in the subsistence sector labour is employed up to the point where its marginal product is zero. Contrarily, in the capitalist sector labour will only be employed up to the point where its marginal product equals the wage rate—the familiar relationship derived from the marginal productivity theory. If wages exceed marginal produc­tivity a capitalist employer would be reducing his surplus since he paid labour more than he received for what was produced.

    This surplus is the key to the Lewis model of development. In Fig. 14 OS is the average product of the subsistence sector—the amount a man would receive there. Here, OW is the capitalist wage.

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