Model Answer
0 min readIntroduction
David Ricardo, a classical economist, laid the foundation for understanding land rent, comparative advantage, and the distribution of income in the 19th century. W. Arthur Lewis, building upon this foundation in the mid-20th century, developed his two-sector model of economic development, specifically addressing the challenges faced by labor-surplus economies. The Lewis model, published in 1954, sought to explain how traditional, subsistence agriculture could fuel modern industrial growth. This answer will delineate the Ricardo legacy inherent in the Lewis model, focusing on the shared assumptions and how Lewis adapted Ricardo’s insights to a dynamic development context.
Ricardo’s Core Ideas and their Relevance
Ricardo’s work, particularly his ‘Principles of Political Economy and Taxation’ (1817), centered around several key concepts:
- Law of Diminishing Returns: Ricardo posited that as more labor is applied to a fixed amount of land, the marginal product of labor declines.
- Rent Theory: Rent arises from differences in the fertility of land. Land with higher fertility yields higher profits, leading to rent being paid to landowners.
- Distribution of Income: Ricardo analyzed how income is distributed among landowners (rent), capitalists (profits), and workers (wages). He believed wages were determined by the ‘iron law of wages’ – wages tend towards the minimum necessary for subsistence.
The Lewis Model: A Dual-Sector Framework
The Lewis model divides an economy into two sectors: a traditional, subsistence agricultural sector characterized by surplus labor and low productivity, and a modern, capitalist industrial sector with higher productivity. The model explains economic development as the transfer of surplus labor from the agricultural sector to the industrial sector.
- Surplus Labor: This is the central link to Ricardo. Lewis adopted the concept of surplus labor, where the marginal product of labor in agriculture is near zero or even negative. This means labor can be withdrawn from agriculture without reducing agricultural output.
- Wage-Profit Dynamics: The industrial sector offers a higher wage than the agricultural sector, attracting labor migration. Crucially, Lewis argued that the industrial wage remains constant (at a subsistence level) for a considerable period due to the unlimited supply of labor from agriculture. This constant wage allows capitalists to reinvest profits, leading to capital accumulation and further industrial expansion.
- Capital Accumulation & Development: As capital accumulates in the industrial sector, the demand for labor increases, eventually driving up wages and initiating a sustained process of economic development.
Ricardo’s Legacy in the Lewis Model: A Detailed Comparison
| Feature | Ricardo’s Model | Lewis Model |
|---|---|---|
| Labor Surplus | Not explicitly addressed; focused on land and rent. | Central concept – surplus labor in agriculture fuels industrial growth. |
| Marginal Product of Labor | Diminishing returns to labor on a fixed land base. | Near-zero or negative marginal product of labor in agriculture. |
| Wage Determination | ‘Iron Law of Wages’ – wages at subsistence level. | Initially, wages remain constant at a subsistence level due to surplus labor. |
| Profit Accumulation | Profits accrue to landowners (rent) and capitalists. | Profits are reinvested in the industrial sector, driving capital accumulation. |
| Sectoral Dynamics | Static model focused on distribution. | Dynamic model with labor transfer between sectors. |
Adaptations and Departures
While heavily influenced by Ricardo, Lewis made crucial adaptations:
- Dynamic Framework: Ricardo’s model was largely static. Lewis introduced a dynamic element by focusing on the process of development and structural transformation.
- Focus on Capital Accumulation: Lewis explicitly linked surplus labor to capital accumulation, a key driver of growth. Ricardo’s focus was more on distribution.
- Dual Sector: The introduction of a dual-sector framework was a significant departure, allowing for a more nuanced understanding of developing economies.
Criticisms and Relevance Today
The Lewis model has faced criticisms, including the assumption of unlimited surplus labor and the neglect of agricultural productivity improvements. However, it remains a foundational model for understanding the early stages of industrialization in many developing countries. The experience of East Asian economies, particularly in the 1960s and 70s, provides some empirical support for the model.
Conclusion
In conclusion, the Lewis model is deeply rooted in the Ricardian tradition, inheriting core concepts like surplus labor, diminishing returns (applied to agriculture), and the importance of wage-profit dynamics. However, Lewis significantly extended Ricardo’s framework by introducing a dynamic, two-sector model that specifically addresses the challenges and opportunities of development in labor-surplus economies. While not without its limitations, the Lewis model remains a valuable tool for understanding the process of structural transformation and economic growth in the developing world.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.