Intersectoral Flows: W. Arthur Lewis' "Surplus Labor" model
Lewis wanted to model development in an economy with a large agricultural sector and a small "modern" sector (e.g., manufacturing). His model was subsequently formalized by John Fei and Gus Ranis, who ended up at Yale. Ranis also made the first formal empirical application, looking at Japan, which around 1960 was still a heavily agrarian developing economy. Below we develop this framework to apply to China. First, let's remind ourselves of our basic growth model, so that we have it always in the back of our mind.
One-Sector Model: Robert Solow, Nobel Laureate - our Cobb-Douglas version
Two-Sector Model: W. Arthur Lewis, Nobel Laureate
The two-sector model is an extension of the standard growth model with which we've worked.
To help understand its structure, think of the starting point as a subsistence economy in which everyone is in agriculture, living a hand-to-mouth existence. For non-agricultural output to increase, then, there has to be a surplus of resources above subsistence, so that not all activity has to focus on agriculture.
For clarity, think of an economy where all manufacturing and commerce is located in a city.
In reality, during the last millennium agricultural by-employment was the norm. Farmers (and their wives) were also weavers or basket weavers or carpenters or raised silkworms. In the US they were shoemakers or clockmakers, while women canned food and sewed garments Indeed, in many places a "putting out" system developed, where a merchant would supply materials to households specialized in various stages of production, who were dispersed about the countryside. This was a viable alternative to gathering laborers at a central workplace, especially as it facilitated switching back and forth from farm tasks to manufacturing as the daily agricultural cycle varied. Of course, it also required high levels of inventory of goods in process, and controlling...
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