Economic Development with Unlimited and Limited Supplies of Labour Author(s): S.

Enke Source: Oxford Economic Papers, New Series, Vol. 14, No. 2 (Jun., 1962), pp. 158-172 Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/2661958 . Accessed: 21/07/2013 15:49
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ECONOMIC DEVELOPMENT WITH UNLIMITED AND LIMITED SUPPLIES OF LABOUR

By S. ENKE the most important articles on economic development to have appeared during the past decade must be included those by Professor Arthur Lewis on the significanceof capitalistic growthwith 'unlimited' supplies of labour.' Few people are able to combine economic theoryand realisticdetail so remarkably. And yet attemptsto restate his 'system' in geometryor algebra suggest a number of inconsistencies. Some of these are sufficiently fundamentalto indicate amendmentsto his theory. And a novel policy implication is revealed on how to 'capitalize' an economy.
AMONG

The Lewis Model The parts of the Lewis model of concernhere are the following. There is a countrythat includes initially a large 'subsistence' sector and a small 'capitalistic' sector. The essence of early economic development is the transferof labour fromthe formerto the latter during a so-called first stage. The marginal product of labour in the subsistencesector is negligible, zero, or negative. The subsistence output is supposedly constant, however. During the firststage there is an 'unlimited' supply of labour to the capitalistic sector-i.e. the labour supply is infinitely elastic for all practical purposes-at a wage based on the product per workerin the subsistence sector.2 During this period, extra capital fromwhatever source is used in the modern sector for capital 'widening' rather than 'deepening', the capital to labour ratio remaining constant. Hence the number of workersemployed in the capitalistic sector is a functionof total capital accumulation,and moreinvestment means morelabour drawn proportionately fromthe subsistencesector. During this first stage it is the product per worker in the traditional sector that determineswage rates in the capitalistsector,whichin turndetermines capital to labour ratios employed there. Output per workerin the capitalist sector is higherthan wages per worker,for labour is joined with capital, and so entrepreneurs enjoy a surplusfromwhichthey can save and invest. Any technologicalimprovements accrue to the capitalists because wage rates cannot rise so long as there is 'unlimited' labour supply. Lewis also holds that the ratio of
1 W. A. Lewis, 'Economic Development with Unlimited Supplies of Labour', The ManchesterSchool of Economic and Social Studies, May 1954; also 'Unlimited Labour: Further Notes', ibid., June 1958. 2 Which may include implicitrent if peasant cultivators own their own land.

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that the percentage of profitsto national income must rise and therefore annual income that is invested must rise also. In all essential respectsthe firststage is a 'classical' model of growth. The peculiaritiesof the second stage, which distinguishit fromthe first stage, are various and not entirelyunambiguous. On the one hand, the second stage is characterizedby higherwage rates, higherratios of capital to labour employedin the moderneconomy,and a total capital stock that accumulates faster than the hired labour force so long as the capitalist sector grows. On the other hand, the second stage is described as being Cneo-classical',which presumably means that profitand wage rates are determinedby the relative marginal productivitiesof the aggregate stock of capital and labour in the modern sector, and not conversely. Capital catches up with the labour supply. The wage of labour to capitalists is no longer determinedby workers' alternatives in the subsistence sector. This last seems to imply a finalabsorptionof the subsistencesector and a zero wage elasticityof labour supply. The diagram below, not offered by Lewis however,illustrateshis thesis perhaps.' The production isoquants referto the capitalistic sector only, the output of the subsistence sector not being shown. OL is the total labour force in the country,OL, indicates the modern sector's employment, and population is assumed constant forsimplicity'ssake. There is OK1 capital in the nation, all in the capitalistic economy,and as capital is saved fromprofitsthere is a movement duringthe firststage away from 0. The capital to labour ratio remainsunchanged duringthis first period. The parallel tangentsdrawn to the output isoquants, assumingwage rates unchanged, confirm that profit rates of returnon invested capital are constant also. At A the countrymustmove fromthe firststage into another stage, ifnot before. The argumentis not really affected if a given residual quantity of subsistence labour refuses ever to migrate for some reason. The capitalist sector, if not the whole economy, expands output, in the last of all stages by reason of capital accumulation and not extra labour. The marginalproductivity of labour must increase as the capital to labour ratio must increase. Real wage rates rise and the profitrate on invested capital falls. Investmentmay cease if a point is reached where those who save would ratherinvest abroad. During the first stage the workersdo not benefitdirectlyfrom development, but they do during the second, the firststage being necessaryto attain the second.2 I i.e. Fig. 2; this has been the subject of correspondencebetween Lewis and the author.
2 One might ask why K, capital is not combined with L labour at D, therebyspreading the capital more uniformlyand thinly throughout the economy, and attaining a higher isoquant at D. But thiswould involve a real wage rate,given interestrates,below output per worker in the subsistence sector. Either these workers would have to labour for a lower wage or capitalist employerswould have to pay a wage above labour's marginal product when combined with capital in modern processes.

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From this descriptionit is evident that most really poor and backward countriesare still in Lewis's firststage. The theoremasserts that almost anythingthat increases a country'sstock of capital, and so causes a transferof workersto more productive employmentin the capitalist sector,is that increasesthe cost indirectly or directlybeneficialto labour. Anything of labour to capitalists will reduce profitsand so slow capital accumulation. The followinganalysis will suggest a number of amendments to the Lewis model, however. Using the same basic assumptions,three distinct which will be designated 1, 2, and 3, and be stages can be distinguished, explained below. It can be shown that during stage 2, while capital to in part by labour ratios in the moderncapitalist sectorare still determined widencapital there will be some the productivityof subsistenceworkers, ing and deepening,and that profitswill be decliningrelative to national income. This mightarrestthe developmentprocess. It depends ratheron that is assumed forcapitalists. More importantprobthe savings function ably, as an incentiveto continuedinvestmentthan the ratio of aggregate profitsto national income, are the profitreturnon invested capital and wealth per capitalist. Another complication is that the importance and duration of stage 2, relative to that of stage 1, depends upon whether accumulations are used to subtract workersfromthe subsistence sector (which is the way Lewis oftenreads) or to add capital to the labour and a wage rate inland already employed in agriculture(therebydeferring crease until stage 3).

Definitionof Sectors
The validity of the model depends partly upon the concept of 'capitalist' and 'subsistence' sectors,partly upon assumptions regardinglabour productivityand familysharing of output within the traditional sector, and partly upon the savings functionof capitalists. These matters help to determinewhetherthe firststage terminateswhen the supply price of labour to capitalist employersrises-a large subsistence sector remaining -or when the wage in the capitalist sector ceases to be based on subsistence alternatives and is determined by marginal productivities in the ofthe two sectors. considerthe definition capital sectorabove. We shall first Lewis does not make the common error,sometimesascribed to him by popularizers,of supposingthat a capitalisticsectoris exclusivelyan industrial one. Mention is made of capitalistic plantation agriculturefor instance. He realizes, too, that 'if the capitalist sectorproduces no food,its expansion increases the demand forfood,raises the price of food in terms aware that of capitalist products,and so reduces profits'.' He is perfectly O op. cit., 1954,p. 173.

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industrializationdepends upon agricultural improvement. Accordingly, his capitalist sectoris simplydefinedas one that 'uses reproduciblecapital, and pays capitalists forthe use thereof'.' The concept of a subsistencesector is equally clear. Lewis definesit as the non-capitalistsector,not using reproducible capital, and not paying capitalists for its use.2 So it includes artisan manufacturers-in the original sense of the word-as well as traditionalagriculture.The subsistence sectoris not limitedto agriculturalists who consumeonlytheirown output. Each sectormay produce both food and non-foodand both may include agriculture. Nevertheless,at least initially,it is evident that most of the agriculturalland is in the subsistenceeconomy. And all industrialoutput is fromthe capitalist sector. Lewis states at one point that the subsistence output is constant3 which would imply a zero marginal product of labour in one sensewhereas at otherplaces he states that subsistencelabour has a negligible, zero, or even negativemarginalproduct.4 This apparent inconsistency can be reconciled sometimes by assuming that hours worked annually per adult in the subsistencesector vary inverselywith the subsistencelabour force. Thus the marginalproduct of an hourof workmightbe positive but the marginalproduct of a subsistencesector worker mightbe zero forthe time being. But it is obvious that, long beforethe subsistenceeconomy is absorbed, its output must decline. The last subsistence workers,with plenty of land to use, must have a distinctlypositive marginal product. Lewis seems to feel that the average product of subsistence labour is very 'low' because it has not been fructified with capital. However, as labour migratesto the modern capitalistic sector,the relative attractiveness of the subsistence sector to workersmay increase. The reason that Lewis gives is that there will be fewerpeople remainingto share its food and otheroutput.5 Actually, as we shall see, the real reason is likelyto be another one. And by stressingcapitalization of agriculture,rather than industry,it can be postponed by an open economy.

to assumptions made regardingeconomic incentives and output sharing within extended families of the subsistence economy. Lewis usually assumes that the supply price of subsistence labour to the capitalist
2 Ibid., p. 147. 3 Ibid., p. 157. Op. cit., 1954, p. 146. Ibid., pp. 142, 189. 5 '... if capital accumulation . . . is reducing absolutely the number of people in the subsistence sector, the average product per man in that sector rises automatically, not because productionalters,but because there are fewermouths to share the product.' Ibid.,

Labour Supply to Capitalists of Subsistence Families The locationof the boundary betweenstages1 and 2 is verysensitive

p. 172.

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sectoris subsistenceoutput per subsistenceworker. But thisis not entirely logical.1 From the outset it is necessary within the subsistence sector to distinguish between (1) a worker'saverage product, (2) consumptionper head, (3) a worker'smarginal product, (4) hours workedper labourer annually, and (5) an hour's marginalproduct.2 It is obvious that most adult male villagers are workingnot only for themselves but for many dependants. The ratio of dependants to adult workingmales may typically be about 3 to 1. Thus a worker's average product is about threetimes,say, his consumptionper head. Lewis seems to assume that the marginal product of a workeris zero-for subsistence output duringstage 1 is supposedly unchanged when workersemigratethe remaining labourerspossiblyworkinga littlemoreeach to compensate. Under these circumstancesthe supply price of subsistence labour to the other sector-temporarily neglectingspecial living costs there-should be consumption per head and not productper worker. Moreover,as workers" mouthsare not the only ones that have to be fed in the subsistencefamily, an emigration ofworkersshould have a relativelysmall effect on per capita. availability of food and othergoods. And in fact,once it is admitted that workers have a positive though low marginal product, the departure of adult males fromthe subsistencefamilymightleave consumptionper head a little lower or higherbut practicallyconstant. Here, perhaps, is the true explanation of 'unlimited' labour supply duringLewis's stage 1. But rural adult males must be assessed as producers as well as consumers. The product of an extra hour's labour is very low in many poor, and overpopulatedcountries: presumablyit is barely sufficient to provide; the extra food calories required forextra energyused and to compensate for the dis-utilityof work. The marginal product of a workerrelative to his average product may be very low, even lower than the ratio of a labour hour's marginalto average product,because of an inverserelation betweennumberof workersand hours workedby each labourer. However,. as more subsistence sector workers emigrate, it becomes increasingly impossibleforremainingworkersto labour more hours each. Moreover,. the ratio of land resources to subsistence workersis increasing,so that. the marginal product of a workermust increase also.
1 Lewis states (op. cit., 1954, pp. 148-9): '. . . in economies where the majority of people are peasant farmers, workingon theirown land, we have a farmore objective index, forthe minimumat which labour can be had is now set by the average product of the farmer;men will not leave the familyfarmto seek employmentif the wage is worthless than they would be able to consume if they remained at home.' But outputper worker is not the same as. consumption per head. There are otherdependent people in the family..The quoted sentence contradictsitself. 2 In what follows,it is supposed that familyconsumptionequals familyoutput in value,. there being no saving.

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Continual emigrationmust eventually result in a worker's marginal product exceeding consumptionper head. A subsistenceworker,by staying with his family,is then adding more output than he is subtractingas consumption. It would disadvantage the familyforhim to leave forthe capitalist sector unless the net wage there, afterdeducting special living costs away fromhome, equals or exceeds his marginalsubsistenceproduct as a worker. Some of the excess he can remithome in money form. Thus the supply price of subsistencelabour to the capitalist sector,as migration continues, is based upon the subsistence worker's marginal product as stage 2 begins. The relations involved are representedin the followingtable and in Fig. 1. There is a village familyof 8 dependants plus from 1 to 5 adult male workers. As the numberof workersvaries (col. 1), thereis a change in total output (col. 2), a change in number of familymembers (col. 3), a change in consumptionper familymember(col. 4), and a change in worker marginalproduct (col. 5). This allows forthe possibilitythat each worker may labour more hours a year ifthereare fewerof them. The point of the table is that consumptionper head varies hardly at all over the range of 7 to 3 workers. When these relationsare charted the segmentof the output per head marked ST is perhaps Lewis's 'unlimited' supply of labour. But, as labour is withdrawnso that 3 or fewermen remain,the capitalist employersin the modernsectormust pay a wage based on the SR segment of the workers'marginalproduct curve.' It remainsto explain the discontinuity involved in having consumption per head establish the supply price of labour, when it exceeds worker marginalproduct,and yet have marginalproduct be determining when it exceeds consumption per head. In the abstract, a subsistence worker the capitalist sector can pay him more should always migrate whenever than his marginalproduct at home, even thoughthis is less than domestic consumptionper head. But there is a practical problem. Domestic consumption per head may approximate some minimumof existence. And
1 In the diagram the horizontal axis repre- R AP sents the number of adult males more or less gainfullyoccupied in a familyenterprise. Pt, The vertical axis represents either physical output or its money equivalent. The AP curve is the output per worker. The MP is the related marginal product curve of a worker. AC The AC curve is average consumption,being \ output divided by all resident family members including 8 dependants. The MP' curve shows what the marginal product of workers FIG. 1 wouldbe ifeach laboured say a standard 2,000 hours annually. It is assumed-vide MP as compared with MP'-that workerslabour more hours when there are fewerof them.

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and Marginal Productof Workers Consumption

(3) Family size
9 10

(1) Workers
1 2

(2) Output
80 150

(4) Output per head

8*9 15-0

Workers marginal product

70 55

(5)

3 4 5 6 7

205 240 260 270 275

11 ,12 13 14 15

18 7 20-0 20-0 19-4 18-3

35 20 10 5

is sufficient to live on, the workerhimself even ifthe capitalists' wage offer may not want to accept less for paid work than he consumes at home, or despite family loyalties. But most important, it is usually difficult impossible forrural familiesto send food or other support to relatives in the capitalist sector, although urban relatives can always remit money home. It is this last asymmetrythat logically explains the discontinuity in labour supply schedules to the moderneconomyof subsistencefamilies. of extending Special living costs in the capitalist sector have the effect the portion of the over-all labour supply schedule that is based on consumptionper head and curtailingthat based on workermarginalproduct.' This is especially so if workerstake dependants to live with them. The theoreticalconclusionis that the supply price of subsistencelabour to the capitalist sector is the higherof (1) domestic consumptionper head plus special living costs if any, or (2) a worker'ssubsistencemarginalproduct. Stages 1, 2, and 3 All this suggests that there are really three distinct stages and not merelytwo. The peculiarityof stage 1 is that thereis an 'unlimited' supply oflabour from the subsistence sector at a constant supply price approximating consumptionper head plus any special costs of living in the capitalist sector. Hence labour to capital ratios are constant. Profitsare a constant fractionof the capital sector's value of output assuming no technological change. The expansion path is shown by OB in Figure 2. Growthdoes not benefitthe workersbut only capitalists if population is stationary. This is clearly Lewis's first stage. The peculiarityof stage 2 is that, although a considerable subsistence sector remains to be absorbed, the price of labour to the capital sector is rising. It is now based on marginallabour product in both sectors. The
1 Diagrammatically, this is shown by the dotted curve, terminatingat S'.

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altering ratios in which labour is combined with capital in the modern sector, and hence the relative marginal products of these two factors,is partly determinedby workers' marginal alternatives in the subsistence sector. Extra sector output is partly contributed by extra employed labour. The expansion path is BCE in the diagram. The peculiarity of stage 3 is that no subsistence sector remains. The relativemarginalproductivities of labour and capital in the modernsector depend upon its productionfunctionand the relative quantities of labour and capital in the economy. The directionof causation has been reversed. Only extra capital-or improved technology-can augment output. The expansion path is vertical in the diagram. Both stages 2 and 3, as definedhere, seem on occasion to fit Lewis's descriptions of his second stage. In both cases wage rates are rising, capital to labour combinationsare increasing,and the profit rate of return on invested capital is declining. This squeeze on profitsmay terminate capital accumulation and growth. It is exactly this danger that makes the distinctionbetween stages 2 and 3 so important. Growthduringstate 3 inevitablymeans higherwage rates that slow capital accumulation. There is no more labour to be had.1 But duringstage 2 thereis more subsistencelabour available. The crucial question is how much higherwages have to be paid to obtain it for use with extra capital. Certainlythis is the case if labour is subtracted from subsistenceagriculture and employedin capitalisticindustry.Fortunately, an alternative exists as we shall see (in the section afternext), and that is to add capital to rurallabour and land to establisha modernagricultural sector. For an open economy,there is hence an opportunityto converta potential stage 2 into an actual stage 1, therebypostponingan increase in wages. But stage 3 can never be transformed into stage 1 because the subsistenceeconomyhas been absorbed.

Capitalists' Savings and ProfitLevels

Continual output expansion of the modern sector requires continuing accumulationsof capital whateverthe stage of growth. The capitalists do practicallyall the saving by the economyfromtheirprofits.In fact,Lewis almost seems to assume that aggregate annual savings and profitsare identical. Consumption of capitalists is apparently zero or constant. he is confident of acceleratinginvestment Accordingly, duringstate 1. But profits may be 'squeezed' duringstage 2, and a fortiori duringstage 3, so that growthmay be slowed or arrested. It will be useful to explore his reasoningon profitlevels and capitalists' savings.
1 International immigrationand 'labour-saving' innovations are ignored.
4520.2 M

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Stage 1 Profits
Capital accumulates supposedly at an acceleratingpace because profits are increasing. As Lewis writes:
So long as unlimitedlabour is available at a fixedreal wage, the share of profits in the national incomewill increase. There are two reasons forthis. First,the share of profits in the capitalist sectormay increase. And secondlythe capitalist sector will expand relativelyto the national income.1

But there are several difficulties. First, if it is profits per se that matter why bother about the relation between capital sector output and national income, the latter including as it does the subsistence sector's output?

A
K2-

L1

L2

FIG. 2

Second, should one consider the ratio of profitsto the capital sector's output relevant,this is notincreasingduringthe first stage ifone abstracts frominnovations. If the countryis an open economy as regards capital movements,interestrates may be an exogenous determination by the outside world,and so the ratio of interest(or profits)to wages is presumably constant too. If the economy is closed, and the capital sector has a homogenousfirstdegree functionof production,a constant real wage will result in a constant residual profitreturnon investment. Fig. 2 is constructedon the assumption that, in expanding from0 to B, there will be constant ratios among total capitalists' profits, total labour payroll, total
1

op. cit., 1958,p. 8.

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sector output, total workersemployed,and total capital stock. Thus the ratio of total profits to total sector output is presumably constant. Third, annual total investment might be determined by the rate of return on investment,and at times one infersLewis assumes that even without technological improvementsthis will increase during stage 1.1 However, if thereare constantreturnsto scale in the capitalist sector,the profitreturnon invested capital will be constant.2 Stage 2 Profits How will aggregateprofits be affected by capital accumulation in stage 2 ? Assumingsome savings, such as an increase in total capital stock from say K1 to K2 in Fig. 2, rival capitalists will seek to add labour drawn from the subsistenceeconomy. For reasons given, to all workersthey will have to pay a higherwage per worker, and theywill add labour until its marginal value product is equal to its increased average cost. Perhaps the new equilibriumis at C on Q2 with L2 labour employed in the modern sector. Wages per workerin the capitalist economy were OL1/Obof Q1and they are now OL2/Oc of Q2. If thereare constantreturnsto scale in the modern sector,3the residual profitsof capitalists will equal the marginal product of capital times total capital employed,and the reward per unit of labour I Vide the diagram on p. 152 of the 1954 article; and in the 1958 article (p. 26) describing entryinto stage 2, he writes: '. . . and the profit margin (now) does not necessarilyincrease all the time'. 2 Lewis seems to have been led astray, and into assuming an increasingratio of profits to capital sector output, by his two-dimensionaldiagram as reproduced here (op. cit., 1954, p. 152). The horizontal axis representsquantity of labour employed in the capitalist sector and the vertical measures in moneythe wage and marginal value product of labour in the capital sector. The wage is W and constant. As capitalists make more investments, the marginal value product of any given ordered unit of labour increases. The area above the wage line but below labour's marginal product curve can be integrated to w representtotal profits. Suppose V1 is the marginal value product curve of labour with $x of capital. If the capital stock is doubled, and assuming constant returnsto scale so as to exhaust the product according to neoclassical dis-L tribution principles, the marginal product that was preFIG. 3 viously the Ith labourer's will now be that of the 21th labourer. Thus V' (dotted) results. But Lewis assumed a curve such as V2. Hence he supposed the total area under the marginal product curve increases proportionatelymore than the rectangularpayroll area as capital and labour are increased by the same percentage. But using continuous curves, and assuming constant returnsto scale, the point is that the second workerwith double capital is the equivalent of workerbefore,the second quarter workerafterwardshas the same product as the the first firstquarter workerbefore,and so on, the two marginal product curves (e.g. V1 and VD) properlyhaving the same vertical axis intercept. 3 Fig. 2 is drawn on the assumption that a doubling of K and L will result in double output, so that, if Q2 is twice the Q1 output, any ray fromthe origin will intersect Q2 at twice the distance as Q1 from0.

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will be higherand that of capital will be lowerthan before. Profitsbecome a smaller fractionof sector output. Why Capitalists Save In any event,not verymuch is knownabout what makes really wealthy capitalists save, in contrast, say, to what makes professionalsalary earners save. It is a very middle-classview, suitable perhaps foradvanced countries,that people consume and so save as a functionof theirincome. In undeveloped countries,the vast majority of the population eithercannot or will not save, and it is the wealthy who do most of the saving without much difficulty.2 One peculiarityof wealthyfamiliesis probably that they consume what constitutesa regressivefractionof owned asset values. They do not alter their way of living fromyear to year as incomes fluctuate. Given their position,both financially and socially,they have a more or less customary expenditurepattern. An extra dollar on consumptionadds little satisfaction and decreasing utilityreturns. But an extra dollar saved may give increasingreturnsas regardsfamilystatus and power. The numberofrival families diminishes very rapidly in a small country as family wealth accumulates. One could very reasonably assert that the savings of wealthy capitalist familiesare the residual that remains afterasset determinedconsumption has been deducted. For example, an individual capitalist's savings may followthe rule: AK* K~r- C. where K* is his wealth in millionsof dollars, r the annual rate of returnon assets, C is the dollars spent on consumptionper milliondollars' worth of capital assets, and the ozexponent is less than unity.3 The above formulation means that capitalists collectivelyconsume less if a given national asset stock is owned by a few capitalists rather than many. But the distributionof produced wealth does not alter capitalists' profitincome. Hence, aggregate annual savings vary inverselywith the
1 It is fortunateforsociety that capitalists do not operate as a monopolisticconspiracy, to changesin total capital basing theirsavings decisions on the relation of changesin profits stock. A slight incrementin capital, used to transferworkers at a slightlyhigher wage, increases the total sectorpayrollby a greaterpercentage than the wage increase. The extra payroll is offsetby reduced total profits. Hence the rate of return on the last dollar of investmentmay be negative. However, most investorssee only the ratio of total profitsto total capital, and this average rate of return(being positive) may provide enough incentive to continue them saving. 2 The importance of the middle class foreconomic development lies not in their savings -which in the aggregate are small relative to those of the wealthy-but to their services as managers, engineers,biologists, doctors, teachers, &c. 3 As r is a variable (see below), the above equation is not tantamount to definingconsumption in terms of income; in addition, even capitalists may have some earned income, but if so the incentive to work is not usually the salary.

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number of capitalists, other things equal. If all real capital assets were owned by ten families,the rate of saving fromprofitswould presumably be greaterthan if equal value assets were owned by a millionfamilies, not because the ten families'individual incomeswould be larger but just because they would have more wealthon an average. All this suggeststhat aggregate savings of an economy depend only in part on total national profitsand not at all on the ratio of profitsto national income. If savings are partly determinedby wealth per capitalist, it becomes important to consider the rate at which capital as contrasted with capitalists is increasingannually-something that is hardly mentionedin economic developmentliterature.If capitalists are increasingat the same rate as most undeveloped countries' populations, which is about 2 to 2-5 per cent. a year,they are doublingtheirnumberseverythirty-five to thirty years approximately. This means that theiraggregateconsumption may be doublingeverythirty-odd years. Ceteris paribus, if annual investmentper capitalist familyis to be maintained,total capital stocks must be doubling every thirty-oddyears also. If capital stocks double sooner, the more rapid increase in individual family assets will in turn increase annual savings, and this recursiveelement (or 'feedback') may be an important growthfactor. The question remains as to whether capital accumulation may be broughtto a halt during stage 2. As explained already, an incrementof capital 'seeking' an immigrantworker will probably raise wages, which higherwages must be paid to all capitalist sectorworkers. Hence the rate of returnon capital (r) will fall. The danger is that an increment of capital r decrease may proportionately by more than K increasesproportionately. The reduced profits, offset further by increased consumption,must then occasion smaller annual total savings. Additions to the stock of capital mighteven cease. Hence it is importantto considerways in which extra capital mightotherwisebe employedwithoutunduly raisingwages during the second stage.

Capitalizing AgricultureNecessary The reason that wages rise duringstage 2 is that the subsistence
marginal products of remainingrural workersincrease as others transfer to the capitalistsector. This is inevitable,if many were but are no longer and usable land is a scarce good. The ratio ofland engaged in agriculture, to labour will then be increasedby workers'emigrationand any remaining labourer becomes a substituteat the marginformore acres. This would not occur, however,if extra capital could be employed in a manner that would not alter the labour to land ratio in subsistenceagriculture. In otherwords,wages mightnot rise relative to profits ifland and

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labour could be transferred into the capitalist sector at 'equal' rates.1 As land is immobile physically, this means that capital must come to it, ratherthan labour migratingto capital. As indicated before,the subsistence sector is not entirelyagricultural, nor is the capitalist sectorentirelyindustrial. Rural labour does not have to leave the rural land in orderto workwith expensive produced means of production. Capital does not have to be combined with labour to the exclusion of land. So one way to ensurean 'unlimited' supply oflabour at a fixed real wage during the early stage would be, not only to subtract subsistence labour for capitalist sector employment,but also to add capital to the labour and land of the subsistence sector. Obviously this latter capital addition would enforce a revolutionin agriculturalpractices. Modernizationand capitalization of agriculturewould have to go hand in
hand.2

There are other potent reasons why there will have to be a certain amount of capitalizingof agriculture anyway. When labour migratesfrom the subsistencesector,thereis a tendencyforthose who remain behind to eat much of the previous share of the departed relatives, so that there must be an increasedfood availability in the nationwhenpopulation shifts to urban industry.3 Moreover, if the capitalist sector is almost entirely industrialand the economyis closed, the desireof capitalist sectorworkers to eat will increase the real income per head within the subsistence economy and shift the terms of trade against the industrial capitalist sector.4 A finalquestion is whetherstage 2 can be eliminatedentirely, with the whole early stage being like stage one, as Lewis describes it. This seems possible if the land and labour resources remaining in the subsistence sector are maintained in the same proportions. This would require no combination of capital with labour that was not accompanied by its traditionalamount of land. Practically,thismeans less stresson industrialization, and concentrating instead on modernizing and capitalizingagriculture. The higher per capita incomes that result will naturally occasion a demand for industrial products that may be importedin exchange foragriculturalexports. A very
1 i.e. the quantity of land transferred, as a percentage of total land in the subsistence sector,must equal the percentage of subsistence labour transferred. 2 If these innovationsare 'land-saving', raisingthe marginal productivityof land relative to labour, so much the better. 3 See Enke, S., 'Food Constraints on Industrial Development in Poor Countries',Southern Economic Journal,Apr. 1961. 4 See Gutman, G. O., and Black, J., 'A Note on Economic Development with Subsistence Economic Papers, Oct. 1957; Ranis, G., and Fei, J. C. H., 'A Theory of Agriculture',Oxford Economic Development', American Economic Review, Sept. 1961; also Enke, S., 'Industrialization throughGreater Productivityin Agriculture', Review of Economics and Statisties,Feb. 1962.

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S. ENKE

171

open economy,withextensiveparticipationin foreign trade, then becomes a condition of national economic development. This was the imperial prescription forcolonial growthand thereare many examples ofits moderate success. However, rightlyor wrongly,such developmentpolicies are politically unacceptable in most independentbackward countries. Conclusions The extraordinarily importantanalysis and conclusionsof Lewis might usefullybe amended or supplementedin at least fivesignificant respects. First, there are three distinct stages in the capital sector's output growth,the firstinvolving only capital 'widening', the second entailing both capital 'widening' and 'deepening', and the thirdoccasioningcapital 'deepening' only. The boundary between the firstand second stage is marked by a change from an infinitely elastic to a less than infinitely elastic labour supply to the capital sector. The boundary between the second and third stage is marked by a change froma positive to a zero elasticity of labour supply. Second, the labour supply by subsistencefamiliesto the capitalist sector is not a continuousfunction. The supply price, assumingextended family sharing of food and other output,is the higherof consumptionper head or workermarginal product. The asymmetryis caused by the ability of urbanized workers to remit funds to rural relatives and the inability of subsistence families to support relatives employed in the capital sector. Third, although nothing conclusive can be asserted, it seems possible that aggregate annual saving by capitalists depends upon their total profitincome and individual capitalists' wealth. There seems no special reason for assuming that annual accumulations are determinedby the ratio ofprofits to national income. Unequally owned assets may contribute somethingto growth. Fourth, the raising of wages in the capitalist sector might be lessened (increasingaccumulation and sectorgrowth),ifincrements of capital were combined with rural land and labour in modern agriculture. The alternative of transferring labour fromsubsistence agricultureto capitalized industry,raising the ratio of land to labour in the subsistence economy, must raise the marginal product of a subsistence worker. This is of special significancewhere limited land resources occasion markedly increasingreturnsto workersin subsistenceagriculturewhen otherworkers emigrate. Fifth,a developmentplan that stresses'capitalistic' agriculture is probably impossiblein a closed economy. The resultant'unbalance' of output would swing the terms of trade against a capital sector that was almost

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172

ECONOMIC DEVELOPMENT

AND SUPPLIES

OF LABOUR

entirelyagricultural. The policy choice is between accepting higherreal wages duringstage 2 or postponingstage 2 indefinitely but acceptingopen trade with the world economy.'

Duke University, U.S.A.

1 The author acknowledgeshis indebtednessto his graduate studentsat Duke University, and to Professor0. P. F. Horwood ofthe UniversityofNatal, whose questions and comments instigated this paper.

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