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 is a 1954 article that discusses his concept of a “dual economy” in a poor country. According to Lewis a poor country’s economy can be thought of as containing two sectors, a small “capitalist” sector and a very large “traditional” (agricultural) sector. Employers in the capitalist sector hire people to make money. Employers in the traditional sector, on the other hand, are not profit maximizing and, therefore, hire too many people so that their productivity is very low. (The immediate question, of course, is why employers in the traditional sector would do this, and economists still debate Lewis’s reasons for thinking this.) Lewis argued on this basis that the way to spur development in poor countries is to shift labor into manufacturing, where it is more productive. 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 is how he explained the inverted-U-shaped 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 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, maintaining 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, Saint Lucia in the West Indies. He entered the London School of Economics on a scholarship at age eighteen. “I wanted to be an engineer,” Lewis later said, “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 the 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.
About the Author
David R. Henderson is the editor of The Concise Encyclopedia of Economics. He is also an emeritus professor of economics with the Naval Postgraduate School and a research fellow with the Hoover Institution at Stanford University. He earned his Ph.D. in economics at UCLA.