Arthur Lewis and Mainstream Economics

Following Arthur Lewis’ recent centenary, we reflect on his contributions to the field of economics and how they relate to the current campaign for pluralism in economics education.

Arthur Lewis was an economist at the University of Manchester from 1948-1958 who made major contributions to development economics. His most notable contribution was the 1954 paper ‘Economic Development with Unlimited Supplies of Labour‘, which would later earn him the Nobel Memorial Prize in Economics. This paper, largely qualitative, sought to understand how capitalist development would take place in developing countries, particularly the newly independent colonies. It has formed the basis of many models in development economics ever since.

Lewis’ model emulated classical political economy, which typically assumed that firms had an unlimited pool of workers available at subsistence wage. Lewis proposed that developing economies could be split into two main sectors: the ‘formal’ and ‘informal’ sectors. The formal (or capitalist) sector was characterised by typical capitalist institutions: wage labour, markets for produced goods, and investment and technological development. The informal (or subsistence) sector was characterised by personal ties, technological stagnation and a surplus of labour. For example, family farms might be able to lose labourers without reducing their harvest, while dock workers would typically be selected from a pool of willing labourers, with many being turned down each day. This effectively meant the ‘marginal productivity’ of a worker in the subsistence sector was zero: they could be removed without impacting output. This meant that labour could flow freely from the subsistence sector to the capitalist sector.

Lewis sought to answer “the central problem in the theory of economic development”, which he saw as understanding “the process by which a community which was previously saving and investing 4 or 5 per cent of its national income or less, converts itself into an economy where voluntary saving is running at about 12 to 15 per cent of national income or more.” In other words, Lewis wanted to understand at what point capitalist development became self sustaining. He saw the key to this as investment: due to the unlimited supply of labour, productivity improvements in the capitalist sector would translate into higher profits rather than higher wages, which would in turn be reinvested (Lewis has been accused of ignoring the role of aggregate demand in this formulation). Note that the term ‘capitalist’ sector need not be interpreted literally, as Lewis himself noted that his analysis could equally have been applied to the Soviet Union, where the state directed investment.

One of the interesting points about Lewis’ theory is that although he used marginal productivity theory to support his point, he later regretted the decision. In fact, in his later ‘Reflections on Unlimited Labour‘, Lewis bemoaned those who had interpreted his theory simply in terms of marginal productivity, concluding that “it was probably a mistake to mention marginal productivity at all”. Controversy had centred over whether marginal productivity in the subsistence sector was really zero or negligible, largely because people had assumed Lewis meant the ‘marginal productivity’ of an hour of work, when in fact he meant the ‘marginal productivity’ of a person. It may be true that an extra hour of work will produce more, but that removing one person from the workforce does not affect total output, as a number of workers are idle at any one point. This is an interesting example of where mathematical theory, far from making economic theory clearer, obfuscated the point of the analysis. It’s easy to understand the intuitive point, made above, that the subsistence sector may have excess labour for various reasons. In contrast, conversations about the marginal productivity of workers and hours quickly confused the debate.

It is interesting to reflect on the question of whether Lewis’ paper would be published in modern economics journals. A quick look through, for example, the Journal of Development Economics, suggests that contemporary development economic is focused on isolated studies which employ in-vogue econometric techniques such as Randomised Control Trials (RCTs). Models which could potentially be thought of as the modern equivalent of Lewis’, such as the University of Manchester’s own Pierre-Richard Agénor’s model of formal and informal labour, are far more technical and mathematical with a lot of moving parts. It is beyond the scope of this post to critique either of these approaches in their own right, but suffice to say that the days of broad, versatile yet simple models such as Lewis’ seem to be in the past. These days, most development papers either answer fairly narrow questions about specific micro-programs, or employ complex general equilibrium models which can be hard to interpret for those who have not worked with them previously and who do not have extensive training in economics and maths. Lewis’ model, on the other hand, can be (and is) taught to A-level economic students.

PCES do not necessarily dispute the usefulness of these econometric techniques and mathematical models for answering certain questions. However, we believe that there is no innate reason these techniques should be the sole methods used in economics. Lewis’ model is a great example of how a simple, largely qualitative model, which makes some use of maths and statistics where necessary but which is also informed by knowledge of history, politics and even classical economics, can be incredibly illuminating and informative. We at PCES would like to see future economics journals contain this type of analysis as well as general equilibrium and econometric techniques (and other types of formal modelling which aren’t currently accepted in the mainstream). Only when multiple approaches are allowed will we truly be able to determine which approaches are best suited to answering difficult ongoing questions such as how development occurs.

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