The Concise Encyclopedia of Economics

W. Arthur Lewis

In 1979, British citizen W. Arthur Lewis was awarded the Nobel Prize, along with Theodore Schultz, for "pioneering research into economic development... with particular consideration of the problems of developing countries." One of Lewis's major contributions to economics was a 1954 article that discussed his concept of a "dual economy" in a poor country. According to Lewis a poor country's economy could be thought of as containing two sectors, a small "capitalist" sector and a very large "traditional" (agricultural) sector. Employers in the capitalist sector hired people to make money. Employers in the traditional sector, on the other hand, were not profit-maximizing and therefore hired too many people so that their productivity was very low. (The immediate question, of course, is why employers in the traditional sector would do this, and economists still debate what Lewis's reasons were for thinking this.) Lewis argued on this basis that the way to get development in poor countries is to shift labor into manufacturing, where it is more productive. Then the capitalists save out of their profits and use this saving to expand, which then adds to growth. Lewis assumed that workers in agriculture save nothing, so that the only source of saving is the capitalists in manufacturing.

Lewis used his model to explain the pattern of growth in countries in general. This was how he explained the inverted U-shape growth according to a country's per capita income. For very poor countries like Bangladesh, growth is slow because the manufacturing sector is small or nonexistent, and therefore there is no large source of savings. For middle-income countries like Korea and Taiwan, growth is high because the manufacturing sector is growing and pulling labor out of agriculture, where it is underemployed. For high-income countries with a large manufacturing sector, like the United States, growth is slower because the gains from diverting labor out of agriculture are almost all exploited.

In the same 1954 article Lewis made a separate argument for poor countries engaged in trade. He argued that poor countries would capture little or no benefit from increasing their exports. Instead, he claimed, they would confer benefits on consumers in the countries that import their exports. Take his example in which the richer countries produce steel (shorthand for manufactured goods) and food, and the poorer countries produce coffee (shorthand for exports of poor countries) and food. Assume that before exports are increased, ten pounds of coffee trade for one ton of steel. Now, because producers in the poor countries have a low opportunity cost of increasing exports of coffee (because the food that they could have produced is worth little), they will increase exports. But doing so will drive down the price of coffee. Say the exchange rate falls to twenty pounds of coffee per ton of steel. This is a good deal for coffee buyers, but not for coffee producers. In essence, Lewis was arguing that poorer countries had latent monopoly power in their exports that they were failing to exploit. These countries would do better, he argued, to divert their production into food and away from exports.

Lewis himself came from a poor British colony, St. Lucia in the West Indies. He entered the London School of Economics on a scholarship at age eighteen. Stated Lewis: "I wanted to be an engineer, but neither the colonial government nor the sugar plantations would hire a black engineer." So he decided to study economics. He earned his Ph.D. from the London School of Economics in 1940. He began working on problems of the world economy at the suggestion of Friedrich Hayek, then chairman of LSE's economics department. After World War II, when many former colonies became independent, Lewis began his study of economic development. Lewis had no sympathy for the view that poor countries should be run by dictators so that they could develop.

Lewis was a lecturer at the University of London from 1938 to 1948, then Stanley Jevons Professor of Political Economy at the University of Manchester from 1948 to 1958. He was vice chancellor of the University of West Indies from 1959 to 1963 and a professor of political economy at Princeton University from 1963 until his death.

Selected Works

"Economic Development with Unlimited Supplies of Labour." Manchester School 22 (May 1954): 139-91.

Economic Survey 1919-1939. 1949.

Politics in West Africa. 1965.

"The Slowing Down of the Engine of Growth." Nobel Lecture. Printed in American Economic Review 70, no. 4 (December 1980): 555-64.

The Theory of Economic Growth. 1955.

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