Economics(Paper-4) - Shivaji University

in subsistence sector.The average productivity of subsistence sector rises, due
to that the wage rate of subsistence sector rises and the wages of capitalist sector
begins rises which lowers the capitalist surplus. It reduces the capital formation
and reverses the expansionary process.
i. The subsistence sector adopts new techniques of production; real wages would
rise in the capitalist sector and so reduce the capitalist surplus.
i. The workers in the capitalist sector imitate the capitalist way of living and agitate
for higher wages and in successful in getting their wages raised the capitalist
surplus and the rage of capital formation will be reduced.
B
The Open Economy:
In open economy there is greater possibility to move capital and labour easily. If
there is surplus labour in other countries, the capitalists can avoid such a situation by
taking resort to either of the following two methods:
i) By encouraging immigration
i) By exporting their capital to countries where there is still abundant labour at a
subsistence wage.
The first way is not possible in present restricted situation, but second way is
possible to export capital is such countries where availability of labour is abundant at
subsistence wage.
B
Critical Evaluation:
1. Unrealistic Assumptions:
The theory assumes a constant wage rate in the capitalist sector until the supply
of labour is exhausted from subsistence sector.Thisseems to be unrealistic because
the wage Rate continuously rises over time in the industrial sector of an underdeveloped
economy.
2. Supply of Labour is not Unlimited in all Countries:
The assumption of unlimited labour supply in underdeveloped countries is not
much relevant as it does not apply to the countries like South America and South Africa.
To some extent, it is applicable to Asian Countries.
3. One Sided Theory:
Prof. Lewis does not consider possibility of progress in agriculture sector, thus, it
is one sided theory.
4. Neglects Total Demand:
Lewis neglects the problem of aggregate demand. He thinks that whatever is
produced in capitalist sector is consumed by itself or is exported. But Lewis does not
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