Saturday, September 10, 2016

A Lewis sector

III. SUMMARY. 18. We may summarise this article as follows
1. In many economies an unlimited supply of labour is available at a subsistence wage. This was the classical model. The neo-classical model (including the Keynesian) when applied to such economies gives erroneous results.
2. The main sources from which workers come as economic development proceeds are subsistence agriculture, casual labour, petty trade, domestic service, wives and daughters in the household, and the increase of population. In most but not all of these sectors, if the country is overpopulated relatively to its natural resources, the marginal productivity of labour is negligible, zero, or even negative.
3. The subsistence wage at which this surplus labour is available for employment may be determined by a conventional
view of the minimum required for subsistence ; or it may be equal to the average product per man in subsistence agriculture,

plus a margin.

4. In such an economy employment expands in a capitalist sector as capital formation occurs.
5. Capital formation and technical progress result not in raising wages, but in raising the share of profits in the national income. 
'6. The reason why savings are low in an undeveloped economy relatively to national income is not that the people are poor, but that capitalist profits are low relatively to national income. As the capitalist sector expands, profits grow relatively, and an increasing proportion of national income is re-invested.
7. Capital is formed not only out of profits but also out of credit creation. The real cost of capital created by inflation is zero in this model, and this capital is just as useful as what is created in more respectable fashion (i.e. out of profits).
8. Inflation for the purpose of getting hold of resources for war may be cumulative ; but inflation for the purpose of creating productive capital is self-destructive. Prices rise as the capital is created, and fall again as its output reaches the market.

9. The capitalist sector cannot expand in these ways indefinitely, since capital accumulation can proceed faster than population can grow. When the surplus is exhausted, wages begin to rise above the subsistence level. 

10. The country is still, however, surrounded by other countries which have surplus labour. Accordingly as soon as its wages begin to rise, mass immigration and the export of capital operate to check the rise.?
11. Mass immigration of unskilled labour might even raise output per head, but its effect would be to keep wages in all countries near the subsistence level of the poorest countries.
12. The export of capital reduces capital formation at home, and so keeps wages down. This is offset if the capital export cheapens the things which workers import, or raises wage costs in competing countries. But it is aggravated if the capital export raises the cost of imports or reduces costs in competing countries.
13. The importation of foreign capital does not raise real wages in countries which have surplus labour, unless the capital results in increased productivity in the commodities which they produce for their own consumption.
14. The main reason why tropical commercial produce is so cheap, in terms of the standard of living it affords, is the inefficiency of tropical food production per man. Practically all the benefit of increasing efficiency in export industries goes to the foreign consumer ; whereas raising efficiency in subsistence food production would automatically make commercial produce dearer.

 15. The Law of Comparative Costs is just as valid in countries with surplus labour as it is in others. But whereas in the latter it is a valid foundation of arguments for free trade, in the former it is an equally valid foundation of arguments for protection.