LEWIS THEORY OF UNLIMITED SUPPLIES OF LABOUR

Rachna Mujoo

Professor

Applied Economics

University of Lucknow

Lucknow

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Lewis believed that unlimited supply of labour is available at subsistence wage rate
in underdeveloped countries. Economic development is result of capital
accumulation. On the other hand capital accumulation is result of withdrawal of
surplus labour from subsistence sector and their employment in capitalist sector.
Lewis believed that classical assumption of perfectly elastic supply of labour holds
true in number of underdeveloped countries. Marginal productivity of labour in
these countries is negligible, zero or even negative due to availability of excess
labour. Since supply of labour is unlimited it provides opportunity for industrial
sector to grow and establish new industries by withdrawing labour from
subsistence sector at prevailing wage rate in subsistence sector . However the
labour is to be provided training before using in the capitalist sector. One of the
basic assumptions of Lewis model is that subsistence sector does not make use of
reproducible capital while capitalist sector does.

Capital formation depends on capitalist surplus. As the capitalists aim at profit

maximization, it is they who save and invest. As the Marginal productivity of
labour is higher than capitalist wage, this results in capitalist surplus. The surplus
generated is reinvested by capitalist in new capitalist assets. The labour is
transferred from subsistence sector to capitalist sector till capital labour ratio rises
and supply of labour become inelastic and all surplus labour disappears.

The given figure (a) shows production function regarding traditional sector. Here
in the upper part of the figure, by employing LF units of labor, the OT output 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 has been
derived
from the TPF curve in the upper part of the figure. This is the scenario in anp[
UDC where 80% to 90% of population lives and works in rural areas. Lewis makes
two assumptions regarding traditional sector - There is surplus labor because MPL
= 0 (as MPLF curve cuts x-axis). 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 units of labour is 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 (K 1)
to TPM (K2) and to TPM (K3). The process that will generate the capitalistic profit
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 represent demand for labor curve because of assumption of
perfect competition. The OA in both lower parts of fig (a) and (b) 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).

ROLE OF STATE AND BANK CREDIT

In underdeveloped countries labour is not in position to save, it is the capitalist

and dominant class consisting landlords, moneylenders etc who save, but they are
involved in prodigal rather than productive investment. It is thus private capitalists
and state capitalists who create capital out of profit. State capitalists can
accumulate capital even faster than the private capitalists. Capital can also created
out of bank credit other than profit. Underdeveloped countries are characterized by
abundant and idle resources along with shortage of capital. In these circumstances
credit creation has same effect on capital formation as profit. However it may lead
to inflation in an economy. However it is only temporary.

OPEN ECONOMY

The advantage in an open economy over the closed one includes encouragement to
mass migration or exporting capital to countries which possess abundant labour at
subsistence wage in case capital accumulation is adversely affected in a country.
However Lewis himself rejected the notion as mass migration of labour as it is
opposed by trade unions.

END OF GROWTH PROCESS

Growth process is not endless, as the capital accumulation is result of profit earned
by a capitalist it slows down when profit reduces. Profit may be reduced by
increase in wages in the capitalist sector. Also the withdrawal of labour from
subsistence sector increases subsistence wages which result in increase in demand
of wages by labour involved in capitalist sector. Also if subsistence sector employs
new techniques, real wages in capitalist sector increases.

CRITICISMS

• Wage rate is not constant in capitalist sector and it continues to grow.

• Not applicable when capital accumulation is labour saving as it will not
absorb labour.
• Providing skills and training to labour coming from subsistence sector is not
a temporary bottleneck.
• Mobility of labour is not easy.
• Low income group also save.
• Inflation from bank credit not self destructive.
• Lack of enterprise and initiative as assumed that only capitalist has skill to
accumulate capital.
References
1.B.N.Ghosh, Population Economics, Deep and Deep publications, 1993.
2.M.L. Jhingan,The Economics of Development and planning, Vrinda
Publications, 2011.
3.G.M. Meier,Leading Issues in Economic Development, OUP, 1992.
4.economicdiscussion.com.

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