The Nobel Prize

W. Arthur Lewis (1915–91)

Arthur Lewis was born in St Lucia, West Indies in 1915. He started work as a clerk at the age of 14 years before winning, at 17, a scholarship which allowed him to study abroad. In 1933 he began his undergraduate studies at the London School of Economics (LSE), where he obtained a BCom in 1937, and a PhD in 1940. Lewis began his academic career at the LSE where he taught from 1938 to 1948, except for attachments to the Board of Trade and the Colonial Office during the Second World War. In 1948 he moved to the University of Manchester, where he held the Stanley Jevons Chair of Political Economy until 1958, a period when some of his most influential work was published. In 1958 he left Manchester to return to the West Indies, where he was principal of University College, West Indies until 1962. Subsequently, when University College was enlarged and renamed, he became the first vice-chancellor of the University of the West Indies. Lewis moved to Princeton University in 1963 as Professor of Economic and Political Affairs, and later occupied the James Madison Chair of Political Economy. In 1970, Lewis left Princeton to become president of the newly created Caribbean Development Bank, but returned to Princeton in 1973 where he remained until he retired in 1983.

During the course of his distinguished career Lewis acted as a consultant and adviser to a number of African countries, including the Gold Coast, Western Nigeria and Ghana, as well as to the United Nations. Lewis’s many offices and honours include a knighthood in 1963, and the award of 20 honorary degrees from universities around the world. He was elected president of the American Economic Association in 1983. In 1979, Lewis was awarded jointly with Theodore Schultz the Nobel Memorial Prize in Economics ‘for their pioneering research into economic development research with particular consideration of the problems of developing countries’ (Nobel Foundation, 2004).

During the first phase of his academic career, while teaching at the LSE, Lewis wrote three main books on international economic history, industrial economics and development economics. In Economic Survey, 1919–1939, published in 1949, he analysed the events and policies of the interwar years in the context of ‘world economic history’ (Lewis, 1949a). His research interest in the economic history of the world economy persisted throughout his career and was manifested almost 30 years later in the publication of his 1978 book, Growth and Fluctuations – see below. Overhead Costs, also published in 1949, is a collection of his essays on industrial economics and includes chapters on ‘fixed costs’, ‘the two-part tariff’ for the pricing of electricity and telephone services, ‘competition in retail trade’ and ‘monopoly and the law’ (Lewis, 1949b). In his third main book, The Principles of Economic Planning (1950), written while at the LSE, he advocated ‘planning through the market’ as opposed to ‘planning by direction’.

When Lewis moved to the University of Manchester, the focus of his work switched to the study of development economics. During this period of his career his worldwide reputation as a development economist was firmly established, most notably through the publication of his two most famous and influential works, namely, his seminal article, ‘Economic Development with Unlimited Supplies of Labour’, published in the May 1954 issue of the Manchester School, and his 1955 book, The Theory of Economic Growth. The remit of the book is far wider than the title suggests as he not only synthesised the state of knowledge on the subject but also considered the development problems of poor nations in the Third World. In his 1954 article, Lewis analysed the ‘dual economy’ of less-developed countries (LDCs). The ‘traditional sector’’, which includes traditional peasant agriculture, is essentially one of self-support and employment. In contrast in the ‘capitalist sector’, which includes industrial production such as manufacturing and mining, employment is motivated by the desire to earn profit. In the early stages of development from a traditional economy to a mature modern industrial economy, the large stationary ‘traditional sector’ is able to supply an unlimited supply of labour to the small dynamic ‘capitalist sector’ at a given real wage rate. The exogenously given real wage rate for unskilled labour is socially determined by minimum standards of living in traditional agriculture, and remains low as a result of rural underemployment and urban unemployment. Profits earned in the capitalist sector provide the source of funds for reinvestment and expansion of output and employment in the dynamic sector. Only in the later stages of development when the surplus or excess supply of labour from the traditional sector is exhausted will wages begin to rise above the exogenously given low levels, by which time expansion in the capitalist sector will have fostered economic development.

The other main idea Lewis put forward in his 1954 article, and which he subsequently developed in his 1969 Wicksell Lectures (Lewis, 1969), was an explanation of what determines the terms of trade between developed and developing countries. In his model he considered two regions, or groups of countries, which each produce two types of goods. The rich North produces steel and food, while the poor South produces coffee and food; the production of food being common to both regions. The South exports coffee to the North, in exchange for steel. Assuming linear transformation between the two goods produced in each region, the terms of trade are determined by relative labour productivity in food between the two groups of developed and developing countries. Higher agricultural productivity in the rich developed countries of the North compared to that in the poor developing countries of the South explains the adverse effect on the South’s terms of trade. Lewis also demonstrated how the South’s terms of trade with the North will deteriorate over time due to faster productivity growth in food than in steel in the North and slower productivity growth in food than in coffee in the South (see Lewis, 1969). The implication of his analysis is that measures are required which increase agricultural productivity in developing countries (such as investment in human and physical capital) in order to redress the unfavourable terms of trade they face with developed countries and to help reduce poverty.

In addition to this highly influential work, which acted as a catalyst to much subsequent research in the field of development economics, Lewis also had research published on the problems of development planning (Lewis, 1965; 1966) and, as mentioned earlier, the history of the world economy. In the latter case in his 1978 book, Growth and Fluctuations, he considered the evolution of the world economy in the period from 1870 to 1913. In his analysis, expansion of manufacturing provided the ‘engine of growth’ in a nucleus of four ‘core’ industrialised countries (Britain, France, Germany and the United States), which served to send out ‘growth pulsations’ to the rest of the world economy through international trade. Lewis considered how growth and fluctuations in the ‘core’ countries affected two groups of ‘periphery’ countries, both of whom exported primary goods to, and imported manufactured goods from, the core. Favourable effects on growth were experienced in the temperate zone of countries of ‘recent settlement’ such as Argentina, Australia, Canada and New Zealand. These countries were largely populated by migrant labour from Europe, and in the temperate zone unskilled labour earned wages which provided a comparable standard of living to that achieved in the core countries. In contrast, unfavourable growth effects were experienced in the tropical zone, consisting of most of today’s LDCs, where subsistence wages resulted from ‘unlimited supplies of labour’. In Lewis’s analysis, differences in wage levels for unskilled labour reflecting differences in labour productivity in food, had serious implications for the size of the domestic markets in the two peripheries, their terms of trade with the core and their respective potential for economic development through industrialisation. In considering the problems of LDCs within the context of the world economy, Lewis was able to demonstrate important links between the core of developed industrialised countries and the peripheries over the period from 1870 to 1913.

Lewis will be remembered first and foremost for his model of economic development with ‘unlimited supplies of labour’ and his contributions to development economics. In particular, his pioneering work has led to much subsequent research into the problems of poverty and underdevelopment experienced by people in Third World countries. Many of his most important papers on industrial economics, developing countries, economic development and international economic relations have been gathered together in a 1983 collection entitled Selected Economic Writings of W. Arthur Lewis, edited by Mark Gersovitz.

Main Published Works
(1949a), Economic Survey, 1919–1939, London: George Allen & Unwin.

(1949b), Overhead Costs, London: George Allen & Unwin.

(1950), The Principles of Economic Planning, London: George Allen & Unwin.

(1954), ‘Economic Development with Unlimited Supplies of Labour’, Manchester School of
Economic and Social Studies, 22, May, pp. 139–91.
(1955), The Theory of Economic Growth, London: George Allen & Unwin.
(1965), Politics in West Africa, Oxford: Oxford University Press.
(1966), Development Planning: The Essentials of Economic Policy, London: George Allen & Unwin.
(1969), Aspects of Tropical Trade, 1883–1965, Stockholm: Almquist & Wicksell.
(1978), Growth and Fluctuations: 1870–1913, London: George Allen & Unwin.
(1983), Selected Economic Writings of W. Arthur Lewis (ed. M. Gersovitz), New York: New York University Press.

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