Unlimited (unskilled) labour can’t be applied to all under-developed countries, e.g. 1958 Africa. However, where population is relatively large compared to capital and natural resources, and marginal productivity of labour is negligible or zero (therefore avail. at subsistence wage). This disguised labour could be said of small holdings held by families, where if some members had other work the remaining could still cultivate the land. Lewis: bag carriers, etc. “Could be halved”. Wages are at subsistence level and therefore unlimited, as long as supply exceeds demand.
additional labour: Women, (depending on many complicated factors), South Wales vs. Lancashire, UK. Lewis, Econ. Dev. With unlim. Sup. Of labour. pg404. Increasing population from excess births to deaths, bringing increase in employment w/out wage increase. (only relevant if brought about by economics development)
However, skilled labour (masons, electricians) is limited so may cause bottle necks but will be fixed by capitalists or govt. with time lag where resources are avail. < Lewis's ignoring of ‘leakages’ in the process of transfer. The transfer costs of shifting the agricultural surplus may be large.
2 sectors: “lagging” agriculture sector and expanding “capitalist” manufacturing sector.
If capital scarce, should not be spread thinly over labour, only as far as marginal productivity of labour is equal to the current wage. Unbalanced expansion and as more capital becomes available workers can be drawn to capitalist sector < failure to predict the capital-intensity of investment and the worsening of the employment problem. Two cases for wages: either determined by the conventional level of subsistence (floor). Or, constant gap of 30% between capitalist wages and subsistence wages< style="color: rgb(0, 32, 96);">assumption that no demand problem exists for capitalist sector output. Absence of demand\lack of an adequate home market may subvert the whole process of capitalist\industrial expansion.
‘process of economic expansion’. The capitalist surplus is re-invested in creating new capital. The capitalist surplus expands until the labour surplus disappears. Then the economy is no longer backwards.
Savings and distribution in the process of development.
Raise the savings-rate, and alter the distribution of income in favour of the saving class: receivers of profit and rent i.e. Profit is the major source of savings> Technical knowledge and capital: not stagnant. If development is to proceed, it is essential that distribution of income worsen. < rising inequalities are inevitable. There are arguments to the effect that diminishing inequalities may foster development. Share of profit in national income automatically rises. Whole benefit of capital accumulation and technical progress goes into the capitalist surplus. Income must not accrue to the landlord class, where is not used for development/hoarded.
Indigenous capitalist class will emerge, it is assumed. However, the existing dominant classes in backward economies likely to be geared to consumption, or to the wrong kind of profits. Thus, foreign or state capitalists may be needed. Inflation in developing countries will probably only be used by industrial class, so if the class is small it will not be effective, and even then may only lead to more money spent speculatively or kept in hoarding or they may invest abroad.
Credit inflation, inflation and development.
In the model, capital created only out of profits earned. But capital can also be created as result of net increase in the supply of money >> bank credit. ‘surplus labour’ is crucial. The difference between profit-financed and credit-financed capital formation: not in ultimate effect on output, but in immediate effects on prices and distribution of income <towards industrial class. In the classical model (i.e. Lewis) ‘inflation for purposes of capital formation can be self-destructive’; but in the neo-classical model: case for deficit finance to secure capital formation. Govt. can control with taxes and loans vs. credit creation. Inflation in developing countries will probably only be used productively by industrial class, so if the class is small it will not be effective, and even then may only lead to speculation or hoarding. <<>
Lewis says capital formation from credit is best used on agricultural programmes (water supplies, fertilizer, etc.) as they quickly form results.
Factors which may slow down the process of capital accumulation: a rise in real wages to a degree which reduces capitalists' profits to a level at which profits are all consumed and there is no net investment. Shift in the inter-sectoral terms of trade against the capitalist sector. Unions. Relationship between industry and agriculture: May benefit from capitalist investment, irrigation etc, pushing up capitalist wages, reducing profit. If capitalist sector creates no food, expansion increases demand for food and raises prices in terms of capitalist products, reducing profits: agriculture must grow (Lewisian balanced growth): Hope that prices fall and productivity increases. A strong rich peasantry may, however, impose adverse terms of trade. The possibility of contradictory tendencies: ‘Floor’ rises, pushing up wages of industrial sectors. < failure to predict the effects of rapid population growth. This may eat into the agricultural surplus and, therefore, into the capitalist profit share.
The implications of comparative advantage, viewed in dynamic terms. The central thrust is in terms of a closed economy. But Lewis does provide something of an open economy treatment. A suitably dynamic theory of comparative advantage is valid for countries with surplus labour. A case for industrialisation in poor countries, and even for the creation of a heavy industry sector. In terms of inflation,
Four basic sets of criticisms
1) The unlimited supplies of labour assumption attacked - The Lewis defence: the difference between the marginal product of a man and of a man-hour. The seasonality issue<>
2) The constant real wage assumption criticised. No real conclusion.
3) Criticism of the assumption that agriculture a simple land-labour activity. Lewis obviously aware that this only a convenient assumption, to allow the model to proceed. But two possibly related sets of assumptions with dangerous implications might be taken from the model:
a) agriculture is incapable of saving and investing to create a stock of capital, and incapable of generating a net surplus;
b) agriculture's investment needs are insignificant.
Lewis unhappy about this criticism more than any other. The Lewis denial (he points to his early stress on the need for balanced growth): not wholly convincing, in that the wrong conclusions might easily be drawn by others.
4) Criticism of the assumption of a primordial, stagnant, untouched traditional economy: not isolated but long ago drawn into exploitative relationship with the capitalist world.
