Discuss the process of capital formation in the lewis model on economic development with unlimited supplies of labour.
Answers
employment. Thus both the labor transfer and modern sector employment growth are brought about by output expansion in that sector. The speed with which this expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector. Though the wages have been assumed constant, yet Lewis says that the urban wages are at least 30% higher than average rural income to induce the workers to migrate from their home areas.
Figure/Diagram:
The process of migration and capital formation is shown with the help of fig (a).
(i) There is a duel economy i.e., the economy is characterized by a traditional, over-populated rural subsistence sector furnished with zero MPL, and the high productivity modern urban industrial sector.
(ii) The subsistence sector does not make the use of 'Reproducible Capital', while the modern sector uses the produced means of capital.
(iii) The production in the advanced sector is higher than the production in traditional and backward sector.
(iv) According to Lewis, the supply of labor is perfectly elastic. In other words, the supply of labor is greater than demand for labor.
The followings are the sources of unlimited supply of labor in UDCs.
(i) Because of severe increase in population more, than required number of labors are working with lands, the so called disguised unemployed.
(ii) In UDCs so many people are having temporary and part time jobs, as the shoe-shines, loaders, porters and waiters etc. There will be no fall in the production even their number are one halved.
(iii) The landlords and feudals are having an army of tenants for the sake of their influence, power and prestige. They do not make any contribution towards production, and they are prepared to work even at less than subsistence wages.
(iv) The women in UDCs do not work, but they just perform house-hold duties. Thus they also represent unemployment.
(v) The high birth rate in UDCs leads to grow unemployment.
Basic Thesis of the Lewis Model:
Lewis model is a classical type model which states that the unlimited supplies of labor can be had at the prevailing subsistence wages. The industrial and advanced modern sector can be developed on the basis of agri. to traditional sector. This can be done by transferring the labor from traditional sector and modern sector.
Lewis says that the wages in industrial sector remain constant. Consequently, the capitalists will earn 'surplus'. Such surplus will be re-invested in the modern sector leading to absorb the labor which are migrated from subsistence sector. In this way, the surplus labor or the labor which were prey to disguised unemployment will get the
the production function regarding traditional sector has been demonstrated. Here in the upper part of the fig., by employing LF of labor, the OT of food production has been produced, while the amount of capital is fixed here. In the lower part of figure we have APL and MPL in the subsistence farming sector which have been derived from the TPF curve in the upper part of the fig. This is the behavior of a UDC where 80% to 90% of population lives and works in rural areas.
Lewis makes two assumptions regarding traditional sector:
(i) There is surplus labor because MPL = 0 (as MPLF curve cuts x-axis).
(ii) All rural workers share equally in the output so that rural real wage is determined by the APL, and not by MPL. Thus it is OA, which has been attained by dividing OT by OLF labor in subsistence sector.
In the fig (b) the upper segment we have the production functions regarding modern industrial sector. In case OL, labor are employed, having the production function TPM(K1), TP1 is being produced. In the lower segment of fig., the demand for labor is D1(K1) at the constant wages (OW) which are 30% higher than the average rural wages.
In the Lewis model, the modern sector capital stock is allowed to increase from K1 to K2 and K3 as a result of reinvestment of profits by capitalist industrialists. This causes the TP curve in the upper part of fig., to shift upward from TPM(K1) to TPM(K2) and to TPM(K3). The process that will generate these capitalistic profits for reinvestment and growth is illustrated in the lower part of fig. (b). The modern sector MPL curves have been derived from the TPM curves of the upper part of the fig. (b). These curves are demand for labor curve because of assumption of perfect competition.
The OA in both lower parts of represents the average level of real subsistence income in the traditional rural sector. But in the modern sector the real wages have been represented by OW (the 30% higher than rural wages).