Sir Arthur Lewis and Theodore Schultz won the Sveriges Riksbank Price in Economic Sciences in 1979 (Nobel Price) for their pioneering research in development economics, with particular consideration of the problems of developing countries. Lewis was a professor at Princeton University and Schultz a professor at the University of Chicago.
Lewis major contribution to economic development came into light in 1954 with his model on dualistic development. His model captures the concerns of many classical economists. Lewis thought explains that, labour shortages in the expanding industrial sector have led to the transfer of labour from agriculture to industry in newly industrialized nations. However, urban industrialists increased their labor supply by attracting rural agricultural workers to migrate to urban areas, given that wages in the urban areas exceeds rural agricultural wages.
Note: The diagram is obtained from Nafziger, E.W. (2006). Economic Development. Cambridge, New York: Cambridge University Press. p. 139.
From Figure 1, subsistence agricultural wage (Ws) is positive whereby, the average product of labour is at subsistence level as agricultural workers divide their produce equally among themselves until food availability is above subsistence. Equilibrium wage is at Ws based on the iron law of wages and higher wages are reduced by population growth, and lower wages increases as output spreads over a smaller population caused by an increase in the mortality rate.
In addition, for capital-intensive urban industrial sector to attract labour from the rural area, capitalist have to pay wages equal to Ws plus 30 percent inducement or Wk (capitalist wage). This higher wage compensates for the higher cost of living as well as any psychological cost of moving to any controlled environment. The urban employer can attract an unlimited supply of unskilled rural labour at Wk such that labour is hired up to the point of QL1 and the total wages of workers are equal to OQL1. The capitalist earns a surplus which is ABC, and saves the entire surplus while the worker saves nothing. Furthermore, the entire surplus is reinvested, increasing the amount of capital per worker and the marginal product of labour. Hence, more labour is hired at a wage rate Wk, enlarging the surplus, adding to capital formation, increasing labour marginal productivity which leads to an increase in labour hired, enlarges the surplus, and so on until all the surplus labour in the industrial sector is absorbed. At QL3, the labour supply curve (SLK) is upward sloping and additional labourers can only be attracted with higher wages. As productivity increases from MRPL3 to MRPL4, the demand for labour (MRPL) curve intersects the labour supply curve at a wage equal to WT and at quantity equal to QL4 in excess of surplus rural labour. Thus, surplus labour is used to create capital with little social cost and capital goods are created without giving up the production of consumer goods.
The major significance of Lewis model is that, growth takes place as a result of structural change. An economy consisting primarily of a subsistence agriculture sector (where there is no savings) is transformed predominately into a modern capitalist sector (where there is savings). Similarly, as the relative size of the capitalist sector increases, the ratio of profits and surplus to national income increases.
Moreover, Theodore Schultz emphasized on the large potential role in agriculture and its role on development. At the time agriculture was characterized as an unproductive activity with unresponsive and obstreperous peasants, Schultz pointed out in his article Transforming Traditional Agriculture by introducing modern inputs and offering higher returns to farm families. His two propositions were first, that policies implemented were heavily biased and in favour of industry and against food producing agriculture, both through a neglect of resource allocation to rural areas and market interventions to maintain cheap prices for the wage goods facing urban consumers. Secondly, farmers given proper price signals and access to modern inputs including the then new Green Revolution could be expected to respond in their own self interest and in so doing permitting the sector to make a major contribution to the prospects for development.
His argument is that, if farmers could be protected from well intentioned governments through market intervention by helping the poor, then they should do so by going to work. He saw the market as the most effective way of mobilizing the talents of agricultural population in a relatively rich country faced with cyclical problems.He also gave insight to the view that, food aid to poorer countries may hinder advancement in agriculture if precautionary measures are not taken into account to minimize the indirect perverse effects. He supported aid programs that could increase productivity farming in third world countries.
Schultz is commonly recognized for his analysis of the importance of investment in human beings, both in agriculture or elsewhere and as a generator of technological change and a major factor in determining growth, while Lewis was sentimentally about the culture of poverty he was trying to affect. Both men were essentially driven by the same ideology and concerns, that dispassionate analysis is the best way to be of help.
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