Arthur Lewis Flashcards
What is Lewis’ two-sector model?
A theory of development wherein significant economic growth is achieved by shifting the surplus of labour from the subsistence sector, such as the agricultural sector, to the modern industrial sector. Used as a prominent theory for China’s rapid industrialisation.
The economy industrialises as the excess labour surplus is absorbed into the industrial sector
Capital accumulation is achieved through excess profit growth generated by the industrial sector, which is reinvested into the economy, therefore driving capital accumulation and eventually, economic growth.
What is the problem of neoclassical models for developing countries?
Neoclassical models generally assume full employment where the labour market clears at equilibrium whilst classical models assume an excess of labour. Neoclassical models struggle to account for development in developing states because their assumption does not account for the surplus labour in developing societies; where multiple people are employed or underemployed due to ethical codes of cultural behaviour wherein each person employs as many people as possible.
Lewis’ model relies on this “unlimited supply of labour” that can be reallocated to the industrial sector without reducing productivity in the subsistence sector. This is an example of Lewis being influenced by classical economics.
What is the consequence of labour scarcity in developed countries?
When surplus labour is almost entirely absorbed into the industrial sector, the possibility of labour becoming scarce arises. If this occurs, wages will rise above the subsistence level, reducing the capital surplus and thus, essentially the profit available to be reinvested. This would result in a reduction in capital accumulation and therefore a reduction in overall economic growth.
When the surplus of labour is exhausted, capitalists can either import more labour through immigration or export capital to developing states where labour is cheaper, thus sustaining profits and ensuring the continuation of economic growth.
How is Lewis responding to Keynes?
Keynes’ theory assumes unlimited labour; however, it also assumes unlimited capital and land. This assumption is applicable to developed economies but not to developing states where infrastructure and capital are limited.
In developing states, capital scarcity constrains economic growth and limits the ability to immediately fully realise the potential of surplus labour.
Keynes assumes that in the long run, the economy faces an excess of savings over profitable investment opportunities. This “savings glut” can hinder growth as excessive saving depresses demand. Conversely, Lewis articulates that developing economies often struggle with low savings and insufficient investment, not a surplus. For developing economies, encouraging capital formation is critical, and surplus labour is not the sole factor affecting growth.
What is the role of savings in developing countries?
Low levels of saving in the developing world is owed to the limited profit generated in the industrial/capitalist sector. Low savings are not a reflection of poverty, but a capital sector that does not encourage significant saving rates due to its limited profit-making ability.
