Lewis theory of agricultural development pdf23.10.2020
This theory explains the mechanism of changing structure of underdeveloped economics from subsistence agriculture to more modern and more urbanized. This model became the general theory of the development process for surplus labor nation during s and early s. Basis model Lewis model consists of two sectors in the economy.
They are i Traditional Sector: This sector is overpopulated subsistence sector where marginal productivity of labor is zero. Due to zero marginal productivity of labor it is possible to withdraw labor from this sector without affecting the level of output. This is why Lewis classified this sector as surplus labor sector. Productivity is high in this sector. Labor is gradually transferred into this sector from traditional sector.
Movement of labor from traditional to modern sector brings the expansion in both out put and employment. The speed of this expansion depends on a Rate of industrial investment and capital accumulation which ultimately depends on the level of profit. Lewis assumes that all profits are reinvested. According to Lewis there should be at least 30 present higher wage rates in urban sector than rural sector in order to transfer labor automatically from rural to urban sector.
Lewis assumed that perfectly competition labor market in modern sector giving fix wage rate and horizontal supply curve of labor. Right panel of the fig.
Upper right fig. The production function is typical with horizontal segment beyond maximum total product. Traditional sector production depends on labor Variable factor and capital and technology fixed factor. The corresponding marginal and average productivity of labor are shown in lower right fig. With the wage rate WA, the equilibrium amount of labor is LA.
Labor more than LA is excess labor. These excess labors are responsible for horizontal section of the production function. Hence they can be transferred to modern sector without reducing output in traditional sector. Capital and technology is fixed in this sector as well.
The corresponding marginal product curve is MPL1. Since labor market is perfectly competitive, marginal productivity curve is demand for labor curve as well. Similarly supply curve is horizontal straight line represented by fixed wage WM. With this quantity of labor and given production function, total output is given by area under curve PS. Similarly total cost of production is given by under WMS. Hence profit is area PSWM.Arthur Lewis put forward a development model of a dualistic economy, consisting of rural agricultural and urban manufacturing sectors.
Initially, the majority of labour is employed upon the land, which is a fixed resource. Labour is a variable resource and, as more labour is put to work on the land, diminishing marginal returns eventually set in: there may be insufficient tasks for the marginal worker to undertake, resulting in reduced marginal product output produced by an additional worker and underemployment.
Urban workers, engaged in manufacturing, tend to produce a higher value of output than their agricultural counterparts. High urban profits would encourage firms to expand and hence result in further rural-urban migration. Join s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning. You can also follow tutor2uEconomics on Twitter, subscribe to our YouTube channelor join our popular Facebook Groups.
He has over twenty years experience as Head of Economics at leading schools. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences. Cart Account Log in Sign up. Economics Explore Economics Search Go. Economics Reference library. Urban incomes are around 3.
A Marxist criticism states that profits will be retained by the capitalist entrepreneur, at the expense of workers. In addition, urban expansion might be driven by increases in capital rather than labour. Evidence suggests that surplus labour is as likely in the urban sector as in the agricultural sector. Migrating workers may possess insufficient information about job vacancies, pay and working conditions. This results in high unemployment levels in towns and cities.
Towns and cities may also be fixed in size and unable to accommodate large numbers of immigrants. This gives rise to slums and shanty towns, which are often illegal, built on flood planes or areas vulnerable to landslides and without sanitation or clean water. Cape Town provides a good example. Globally 1bn people live in slums. Subscribe to email updates from tutor2u Economics Join s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning.
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Development of Agriculture: 3 Phases
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The Lewis Theory of Development
Cost Analysis. Various Revenue Concepts. Price and output Determination Under Perfect Competition. Price and Output Determination Under Monopoly. Principles and Theories of Macro Economics. National Income and Its Measurement.
Principles of Public Finance. Public Revenue and Taxation. National Debt and Income Determination. Fiscal Policy. Determinants of the Level of National Income and Employment. Determination of National Income. Theories of Employment. Theory of International Trade.These theories owe their origin to the celebrated work of Nobel Laureate Sir W. Arthur Lewis in An elaborate discussion of the labour-surplus economy is given by G.
Ranis and John Fei in At some later point in the history of dual economics, the supply of labour is exhausted then only a rising wage rate will draw more labour out of agriculture. With their acute material poverty, it is difficult at first sight to imagine how the overpopulated countries can increase their savings without great hardships.
Moreover, their rapid rates of population growth lend themselves to calculations of aggregate capital requirements which must be made available if their per capita incomes are to be maintained or raised. So, if a few workers are removed from land, the total product remains unchanged.
In Lewis model the transformation process or the process of structural change starts by an autonomous expansion in demand in industry as a result of changes in domestic consumer tastes, in government purchases, or in international markets. The central point is that labour here considered homogeneous and unskilled shifts from agriculture into industry. Redundant supplies of unskilled labour to industry at existing wages hold down industrial labour costs. But higher demand and higher prices in industry result in higher profits.
When these profits are ploughed back into industrial capital formation, demand for industrial output both for consumption goods by newly employed workers and investment by capitalists rises, causing further shifts of labour out of agriculture into industry.
The process comes to a halt when agricultural productivity rises to a point where the supply price of labour to industry increases, i. In the absence of rural-urban differences in the cost of living, this occurs when the marginal product of labour in the two sectors are equal. Lewis postulates the existence of a subsistence sector with surplus labour and he sees in this the seed for the subsistence sector. Since there is surplus labour from the subsistence sector, the capitalist sector draws its labour from the subsistence sector and it is assumed that as a result of rapid increases in population in already densely populated countries the supply of unskilled labour is unlimited.
So, the capitalist sector can expand indefinitely at a constant wage rate for the unskilled labour. The actual market wage rate will be determined by earnings in the subsistence sector. Another point to note is that in the subsistence sector labour is employed up to the point where its marginal product is zero. Contrarily, in the capitalist sector labour will only be employed up to the point where its marginal product equals the wage rate—the familiar relationship derived from the marginal productivity theory.
This surplus is the key to the Lewis model of development. In Fig. Here, OW is the capitalist wage. We start with a fixed quantity of capital, and in this situation the demand for labour is represented by the marginal productivity schedule of labour NQ. Under profit-maximising conditions, labour will be applied to the point where the wage, W, equals marginal productivity, i.
Workers in excess of O a will earn whatever they can in the subsistence sector. Development takes place since part of what is produced accrues to the capitalist in the form of a surplus WN, Q 1 in Fig. This reinvestment produces an increase in the amount of fixed capital and causes a shift in the marginal product of labour curve form N 1 Q 1 to N 2 Q 2 in the next period. The Lewis model is close to the Ricardian one.
It neglects the central concern of Ricardo: how the price of food is to be held down. If it he assumed, however, that the supply of labour to industry is infinitely elastic at a steady wage because of surplus labour in agriculture, this can help explain initial development which comes to an end when wages start to rise with increased capital formation. Productivity increases in industry interact with productivity increases in agriculture after the supply of labour has been drawn down.
The Lewis model begins with the classical of Marx, but ends with a much happier neo-classical result. Initial growth in the dual economy is largely in the form of increased profits made available from underpayment of wages. Instead of the inevitable crises of Marx, however, the dual economy of Lewis eventually runs smoothly as a single economy under neo-classical rules.This is one of the best-known early theoretical models of development that focused on the structural transformation of a primarily subsistence economy.
He wrote this paper while he was at Manchester, but subsequently moved to the West Indies, where he was born, and was later awarded the Nobel Prize in The Lewis model of economic development postulates two sectors, the subsistence and the modern.
This has often been interpreted as agriculture and industry, although Lewis himself meant a broader class of subsistence, which included agricultural labour, the urban poor, domestic servants and so on.
The subsistence is a reservoir of surplus labour whose low wage prevails across the economy and in the industrial sector as well. The capitalist industrial sector develops rapidly by drawing on this infinite supply of very cheap labour. Wages remain constant and low for long periods of time, and economic growth occurs as the rising share of profits gets reinvested. In the Lewis model, eventually the reservoir of cheap labour gets exhausted, capital accumulation slows down and wages get determined by marginal productivity as in standard economic textbooks.
The Lewis model is more than 50 years old, but it has been eminently validated by the experience of development of many countries in Asia and Africa. A rural subsistence sector characterized by zero marginal labor productivity—in the sense that surplus labour can be withdrawn from the agricultural sector without any loss of output. A high-productivity modern urban industrial sector into which labor from the subsistence sector is gradually transferred. In simple words, when the surplus labourers are withdrawn from the farm sector, it will not affect the output.
The Lewis Two Sector Model of Development
This surplus labour is when involved in industrial sector, it will improve productivity. Thus, the surplus labor, which was not generating any marginal productivity, will generate profits when they are shifted to the industrial sector. When the profit is reinvested in innovative machines and tools, the per labour productivity will increase and profits will boost. Thus, a cycle of re-investments and profit increments is created which results in self- sustainable growth process. Comments Cancel Reply.Mellor divides agriculture to fall in one of the three phases.
The phases are: 1. Traditional Agriculture 2. He does not define agriculture in the sense of equilibrium. For him, traditional agriculture is a backward labour intensive agriculture which uses only crude form of capital. According to Mellor, farm organisations in traditional agriculture, though different in different countries because of difference in physical, economic and social factors, have some common features also.
For instance, most of the farms are cultivated by the farmers with their family labour. Even the capital is provided by the farmer from his own source. The farms are generally small in size and the word force per farm is higher on these farm. When compared with that in high income countries. These features, result in low productivity and low income in these farms.
So far as resource allocation on these farms is concerned Mellor follows Schultz. According to Mellor, land and labour constitute the major inputs on these farms. The capital is in a very crude form. It is direct embodiment of human labour and therefore, its productivity is quite low. The main input, applies in such an agriculture.
As land is limited and so is the capital, additional labour force is the only source of increasing income in such an agriculture. However due to the application of law of diminishing returns to labour, per capita productivity and income falls as more and more labour is used to produce more output.
Mellor does admit that in traditional agriculture, some non-traditional inputs like fertilizers have been used. But he points out that their use has not added significantly to the output mainly because other complementary inputs are not used along with the fertilizers. Mellor is of the view that there is much under employment in traditional agriculture.
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Arthur Lewis presented in Yet it fails to capture his basic insights, leaving generations of students with the misapprehension that he saw industrialization as a panacea. If we avoid the limitations of the neoclassical recasting and reflect on the variations of Lewis's models, which he presented within the classical tradition, we can re-evaluate some of Lewis's neglected contributions.
These relate to accumulation and trade as historical and contemporary problems and to the fundamental role that agriculture plays in development. Citations References Gollin sees Lewis as "not only seminal, but also profoundly useful. To this end, the focus here is to revisit Lewis' work and in the process correct misconceptions about the paper, especially as it relates to technological advancement in general, and specifically in the subsistence sector.
The latter owns capital which it could rent. Second, the disconnect between the capitalist sector and the subsistence sector are not 'stark', which supports the view of a continuum of sectors as suggested by Gollin The example to follow goes a step further than Gollin in shrinking the difference between the sectors. Jan J Develop Area. Samuel Braithwaite. The development economist W. Lewis argued in the s that a country was poor because it had a large subsistence sector and a small capitalist sector, and that productivity was low in the subsistence sector and thus wages were low.
Lewis' work has been often misinterpreted Figueroa His two sector model was not a division into agricultural and industrial sectors, but rather 'the division of the economy into two sectors had to turn on profits' Lewis, cited in Figueroa The two sectors are a capitalist and non-capitalist sector. May Dev Pol Rev. Lindsay Whitfield. For the sake of less developed countries, it is time to adjust the discussion of international development assistance on poverty reduction.