W. A. Lewis’ theory of unlimited supply of labour
W. Arthur Lewis’ theory is based on his proposition of unlimited supply of labour. Like the classical economists, he believed that in underdeveloped economies supply of labour is unlimited at a subsistence wage rate. The economic development takes place when these surplus labour are withdrawn from the “subsistence sector” and are placed in “capitalist sector” through capital accumulation. In other words, transfer of labour from the labour surplus agriculture sector to the industry sector will promote the balanced development of both the sectors.
Lewis model divides the economy into two sectors i.e. the Capitalist sector and the Subsistence Sector. The capitalist sector is defined as “the part of the economy which uses reproducible capital, and pays capitalists for the use there of”. In the capitalist sector, the use of capital is controlled by capitalist, who hire the services of the labour. On the other hand, the subsistence sector, does not use reproducible capital. In subsistence sectors the total productivity is lower as compared to capitalist sector.
The labourers employed in the subsistence sector are generally backward, illiterate and unskilled. On the other hand, the labourers in the advanced capitalist sector are literate, sophisticated and skilled. In other words, marginal productivity of labour deployed in subsistence sector is negligible, zero or even negative. Whereas those labourers employed in the capitalist sector have high marginal productivity of labour and are more productive.
In this dualistic situation, for the development of the economy, new industries can be established or existing industries can be expanded by transferring labour from the subsistence sector. However, the industries require skilled labour, according to Lewis, skilled labour is only a ‘quasi bottleneck or a temporary bottleneck’ which can be removed by providing training facilities to the unskilled labour. Lewis proposed that gainful employment of the unlimited labour force requires that rate of savings and investments should be at least 15 percent of national income. This is a central problem for the developing countries having low capital formation. The development of the developing countries therefore requires high capital accumulation. On the basis of above analysis, it can be concluded that unskilled labour is not a bottleneck to economic development in majority of under developed countries but the capital formation is a sinequa- non..
The key to economic development in Lewis’ model is capital formation and this is possible when the capitalist use a part of its surplus in reinvestment for creation of new capital. They lead to increase in employment and productivity. In the process, the capitalist draws labour from the subsistence sector and this reinvestment of profit continues till entire surplus is absorbed.
Thus, profits and their reinvestment have great importance in economic growth.
The three important components of Lewis theory are:
(i) role of technology in development;
(ii) role of private capitalist in development process,
(iii)role of government and
(iv) role of bank credit.
Lewis describes that the relationship between capital, technological progress and productivity is critical determinant of development. Capital and technological knowledge are critical factors for higher economic growth and development. Lewis is of the opinion that the growth of technological knowledge outside the capitalist sector is important, as it raises the level of wage and reduces capitalist surplus.
Secondly, according to Lewis, neither the salaried class nor the petty businessmen were to add to capital formation. He therefore opined that the state capitalists and indigenous private capitalists create capital out of profits and therefore, the earned profit should be promoted for the purpose of capital formation and subsequently economic growth. Thirdly, saving plays a crucial role in the development of an economy. Lewis observes that savings are to be done by people who receive profit or rent.
Higher the saving higher will be investment and finally the capital formation which will promote economic development. It is because of increased savings, the capitalist sector of the economy expands leading to expansion in national output and level of employment. Lastly, bank also plays a critical role in the economic development of a nation. Capital is not only created out of profits earned, it can also be created as a result of net increase in money supply, especially bank credit. Creation of banks acts as a stimulator of growth in national income. It raises both output and employment.
According to Lewis, this growth process will not continue forever, but will come to a halt for the following reasons i.e. growth of capitalist sector will reduce the surplus labour in subsistence sector, resulting in rise in wage of labour in capitalist sector. This will further result in fall in the capitalist surplus. It will reduce capital formation and reverse the expansionary process.
Criticisms of Lewis’ Unlimited Supplies of Labour Theory
Some of the criticisms leveled against Lewis’ theory are as follows:
(i) The theory assumes that in the capitalist sector wage rate will remain constant till surplus labour in the capitalist sector is exhausted which is unrealistic.
(ii) The assumption of unlimited supplies of labour in developing countries is also unrealistic.
(iii) This is a one sided theory, reason being that it considers expansion of capitalist sector and does not talk about the role of agriculture or subsistence sector in development. However, agriculture plays an important role in development.
(iv) The Lewis’ theory assumes that the marginal productivity of labour in over-populated underdeveloped countries is zero or negligible. However, Schultz was of the opinion that the marginal productivity of labour in over populated underdeveloped countries would not be zero.
(v) It is also very difficult to find out the exact number of surplus labour who would move from the subsistence to the capitalist sector.
Furthermore, the mobility of labour is also not easy.
(vi) Lewis assumes that withdrawal of labour from the subsistence agriculture sector to capitalist sector will not affect the productivity in the subsistence sector. However, in actual, it will affect the productivity.