Unit 1 Prosperity, inequality, and planetary limits

1.9 Structural transformation: From farm to firm

With the growth of capitalist firms exploiting the opportunities of the technological revolution to raise productivity through innovation, the structure of the economy changed. Agriculture was no longer the primary source of income and output.

First, although agricultural output grew substantially, manufacturing output (and later, services) grew even faster and began to account for a much larger fraction of output. Second, partly as a result, the proportion (or share) of the population engaged in agricultural production fell while the manufacturing (and later, services) shares grew.

In this line chart, the horizontal axis shows years from 1300 to 2019. The vertical axis shows the non-agricultural share of labour force, and ranges from 0% to 100%. In Italy, this share was approximately 37% until 1800, and it increased to 98% by 2019. In France, this share was about 25% between 1400 and 1500, it increased to 37% by 1800, and it increased to 98% by 2019. In the Netherlands, this share was 40% in 1500, it increased to 60% in 1700 and did not change until 1850. It then increased to 98% by 2019. In the United Kingdom, this share was 40% in 1400. Between 1500 and 1800, it increased to 77%. It slightly decreased to 74% in 1810, but then increased again to 99% in 2019. In India, this share was 25% between 1890 and 1940. It increased to 60% by 2019. In China, this share increased from 20% in 1950 to 75% in 2019.

Figure 1.15 Share of non-agricultural labour force in total labour force (1300–2019).

Tirthankar Roy. 2005. ‘Agricultural Labor and Economic Transition in Colonial India: Lessons from Wage Data’. Working Paper. ‘World Development Indicators’.; Pedro Lains and Vincente Pinella. 2009. ‘Agriculture and Economic Development in Europe Since 1870’. Routledge: Taylor and Francis India

Figure 1.15 shows this structural transformation of the economy in several countries over 800 years. In all countries, especially in the last century and a half, the non-agricultural share of the workforce has risen. But the agricultural share in India and China remains high compared with the other economies. The economist, Arthur Lewis, developed a model of the economy that explains how this transformation takes place.

Great economists Arthur Lewis

Portrait of Arthur Lewis

Arthur Lewis (1915–1991) won a Nobel Prize and received a knighthood from the British queen for his work in economics, but this was not his initial field of choice. ‘I wanted to be an engineer,’ he wrote, ‘but this seemed pointless since neither the government nor the white firms would employ a black engineer.’

Born in the Caribbean island (and then British colony) of Saint Lucia, Lewis finished secondary school at age 14. As a young boy, required to remain at home for a couple of months due to illness, he learned so much studying by himself and being taught by his father that when he returned to school, he was transferred from the fourth to the sixth grade. At the London School of Economics, he was the student of another great economist, Friedrich Hayek (see Section 8.1).

What is now called the Lewis model represents an economy that has both a modern ‘capitalist’ sector producing industrial goods and a ‘subsistence’ sector of family farms producing just enough to sustain the family. The capitalist sector is composed of businesses, in which the owners profit from introducing new technologies to reduce the cost of the products that their employees produce. If the capitalist sector is profitable, the businesses expand, drawing in additional labour from the subsistence sector.

We use the Lewis model in the macroeconomics volume to explain why the hockey stick has not yet materialised in some countries.

Two aspects of the Lewis model explain the hockey stick. The first is the constant search for new technologies in the capitalist sector that allows more goods to be produced with an hour of labour, and thereby increase the business owners’ profits. The second is that the capitalist sector is more productive than the subsistence sector (more output per hour) so moving workers out of the subsistence sector (illustrated by the ‘non-agricultural share of the labour force’ in Figure 1.15) increases the average productivity of the economy. And this raises income per capita as shown by the hockey stick in Figure 1.1.

The essay that won him the Nobel Prize was titled ‘Economic Development With Unlimited Supplies of Labour’, referring to the fact that before the hockey stick tipped upwards, the subsistence sector covered most of the economy, so that the capitalist sector could expand by drawing in additional labour almost without limit. In that paper, Lewis drew attention to the fact that ‘The classics, from [Adam] Smith to [Karl] Marx enquired how production grows through time [and] determined simultaneously income distribution and income growth …’ He sought to return the attention of contemporary economists to these questions of growth and income distribution.

Arthur Lewis. 1954. ‘Economic Development With Unlimited Supplies of Labour.’ Manchester School 22: pp. 139–191.

Question 1.8 Choose the correct answer(s)

Read the following statements about Arthur Lewis and choose the correct option(s).

  • Arthur Lewis investigated questions that were asked by the first economists.
  • The Lewis model assumes that the supply of labour to the capitalist sector is unlimited.
  • In the Lewis model, income per capita rises when workers move from the subsistence sector to the capitalist sector.
  • One aspect of the Lewis model is the profit-seeking motives of the capitalist sector.
  • He tried to explain how production grew through time and affected income distribution and income growth, which were questions considered by Adam Smith and Karl Marx in the eighteenth and nineteenth centuries.
  • The Lewis model does not assume that supply of labour is unlimited, but before an economy begins ‘hockey stick’ growth, most workers are in the subsistence sector so there are few constraints on the supply of labour available to the capitalist sector.
  • The Lewis model assumes that the capitalist sector is more productive than the subsistence sector, so the movement of workers to the capitalist sector would raise average productivity and average income per capita.
  • The Lewis model assumes that the capitalist sector constantly seeks new technologies to raise the profits of business owners.