The document discusses the Lewis model of economic development, which describes a dual-sector economy consisting of a subsistence agricultural sector and a capitalist industrial sector. It details how surplus labor from agriculture is absorbed into industry, leading to capital accumulation and economic growth, while highlighting various assumptions and criticisms of the model. Key points include the impacts of labor movement, wage dynamics, and potential limitations of capital development in underdeveloped economies.

1. THE THEORY OF UNLIMITED SUPPLY
OF LABOUR
(LEWIS MODEL)
Sr.Sindhu P.J
(Sr.Sharin CTC)

2.  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.

3. CAPITALIST SECTOR

4. 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.

5. SUBSISTENCE SECTOR

6.  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,
 and 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.

7. Assumptions
 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.

9. 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.

10. GRAPHICAL REPRESENTATION OF THE
THEORY

11.  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.

12.  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.

13.  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.

14. 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

15.  (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.

16.  (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.