Arthur Lewis as Smithian; and the Kuhn-loss as an arbitrage opportunity

In two recent posts (recall here and here), I explored the significance of Eric Williams’ respectful engagement with Adam Smith in his very early writings). In re-reading (Sir) W. Arthur Lewis’ (1954) “Economic Development with Unlimited Supplies of Labour," The Manchester School 22(2): 139-191 (here’s a PDF of a version), I noticed a similar respect. (This is actually well known among historians of economics, and in what follows I won’t do justice to the sophisticated existing literature on Lewis’ use of Smith.) Now, if you don’t know, Lewis’ paper, it is really seminal in the history of ‘development economics’ and contributed to his (1979) Nobel prize in economics.

Smith is mentioned five times in the paper. The first time is in the second sentence of the paper (my references will be to section/paragraph numbers).

[A] This essay is written in the classical tradition, making the classical assumption, and asking the classical question. The classics, from Smith to Marx, all assumed, or argued, that an unlimited supply of labour was available at subsistence wages. (¶ 1)

So, first of all, for Lewis, Smith is not history, but a key node in a living tradition. Usually when a writer talks of ‘classical’ economics or the “classics,” they mean discarded economics (and study of it involves steep opportunity costs). But not Lewis. He invites being read (or situates himself) as a continuation or extension of a tradition. The pairing of Smith and Marx, as being on the same intellectual team, during the height of the cold war is also no small matter.

As an aside, I am pretty confident that the terminology of ‘classical economics’ is an invention of Marx in order to create a target of criticism (or ideology critique) in the same way that Adam Smith coined ‘mercantilism’ in order to overcome and criticize it.

Be that as it may, on Lewis’ telling one defining feature of the classical tradition — which is key to Lewis’ own positive argument is this commitment to the availability of unlimited supply of labor at subsistence wages. I don’t think, actually, that Smith was very self-conscious about this point because he is much more interested in the conceptually related point that going below subsistence wages reduces population; because he is really interested in how to prevent famine.

The second mention of Smith appears as a seeming aside.

[B] Next, we note the use of the terms “capitalist” sector and “subsistence” sector The capitalist sector is that part of the economy which uses reproducible capital, and pays capitalists for the use thereof. (This coincides with Smith’s definition of the productive workers, who are those who work with capital and whose product can therefore be sold at a price above their wages) (¶ 3)

The capitalist vs subsistence sector distinction is rather important to Lewis. To simplify greatly, the point of development in Lewis’ model is to ensure that the capitalist sector draws population/workers from the subsistence parts of the economy into the capitalist bits, and the latter generates a self-sustaining process. As he puts it later in the very same paragraph, “As more capital becomes available more workers can be draw into the capitalist from the subsistence sector, and their output per head rises as they move from the one sector to the other.”

Now, at this point Lewis re-inscribes his analysis in the classical tradition through Smith. It’s interesting that he insists that his own distinction ‘coincides’ with a Smithian distinction (between productive/unproductive labor) often ridiculed by mainstream economists since as I learned from my late friend Mark Blaug. (In later years Lewis never abandoned Smith’s distinction, or its spirit, but he would note problems in Smith’s presentation of it.)

But while Lewis’ version of Smith sounds like Smith, it’s actually not Smith’s own definition of productive labor. I quote from Wealth of Nations, “there is one sort of labour which adds to the value of the subject upon which it is bestowed: There is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive labour.” (WN 2.3.1, p. 330)

At first blush Smiths definition is compatible with Lewis’ gloss. In particular, that productive labor makes capital accumulation possible is I think really the point of Smith’s analysis. So, there is a genuine affinity between the two. That Smith’s account of productive labor mattered to capital accumulation was not original to Lewis; it was stressed in the 1948 dissertation by the Burmese economist Hla Myint at LSE. (On this see Mauro Boianovsky (2017) “When the history of ideas meets theory: Arthur Lewis and the classical economists on development,” CHOPE Working Paper, No. 2017-08, Duke University, Center for the History of Political Economy (CHOPE), Durham, NC.)

In addition, the next sentence in Wealth of Nations, while not strictly part of the definition (it is presented as an inference from it, and really an illustration), seems to support Lewis’ interpretation: “Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master's profit.” (WN 2.3.1., p. 330; see also WN 2.3.6, p. 332)

Somewhat surprising, then, lurking here would be a Smithian account of capitalist profit or looking ahead at a Marxian story about exploitation. But to the best of my knowledge productive labor plays no such role in Smith’s account of profit nor in a neo-Smithian account of exploitation. (That is, the material just quoted is not Smith’s analysis of profit.)*

And the reason, why I am hinting at some reservation about Lewis’ move here (which seems closer to Marx than Smith) is that for Smith unproductive labor, while unable to contribute to capital accumulation, is quite compatible with being a source of profit. This is a bit occluded in Smith (and perhaps for Smith himself) because he has a tendency to emphasize the means by which consumption of services diminishes the capital of the person consuming services. And since his paradigmatic case of such consumption is, in fact, the employment of servants (and so it’s only a cost to the employer), Smith does not emphasize that one could also profit from employing unproductive labor without consuming its services.

For example, important examples (for Smith) of unproductive labor are artists and “respectable” professionals (like lawyers, physicians, etc.) Smith allows that these can be quite lucratively renumerated (even if the labor market has the character of a lottery for them), despite the fact that they diminish society’s capital. (WN 2.3.3., p. 331) And even in those times, lawyers certainly employed scribes/servants who were a source of profit to them.

Again, I don’t mean to suggest that Lewis misrepresents Smith altogether here. Because Smith immediately after introducing the productive/unproductive labor distinction, Smith turns to an analysis of the ratio between or proportion of the productive/unproductive bits of the workforce. And he insists that “This proportion is very different in rich from what it is in poor countries.” (WN 2.3.8. p. 334.) And indeed he goes on to compare feudal periods with his own “opulent” times. (And there is a natural way to read Smith on feudal society as exhibiting a lot of disguised unemployed/surplus labour; but about that some other time.)

At that point, Smith’s analysis gets odd from Lewis’ perspective. (This is not remarked by Lewis.) For Smith, it is quite clear that agriculture can be quite productive in Smith’s sense. (This is what he shares with the physiocrats.) And that it is productive in the salient sense is characteristic of opulent societies. And in that context, Smith literally speaks of the landlord profiting from “service” labor. (WN 2.3.9, p. 234)

Before I move on to the next passage, an aside. Smith does not identify ‘capitalism.’ But in so far as he thinks economies become more productive and have capital accumulation he does not think it’s a single kind of thing. From Smith’s perspective there are rival ways of conceptualizing and being capitalist: mercantilism and his own more liberal system are rival conceptualizations of capitalism and they also promote very different kinds of social organizations and practices in the economy (and out of it). Lewis’ contemporary, Eric Williams, is very careful about tracking these distinctions. Lewis less so.

Okay let’s return to the main thread:

[C] We cannot say that capital will always grow faster than labour (it obviously has not done so in Asia), but we can say that if conditions are favourable for the capitalist surplus to grow more rapidly than population, there must come a day when capital accumulation has caught up with labour supply. Ricardo and Malthus did not provide for this in their models, because they over-estimated the rate of growth of population. Marx did not provide for it either, because he had persuaded himself that capital accumulation increases unemployment instead of reducing it, (he has a curious model in which the short run effect of accumulation is to reduce unemployment, raise wages and thus provoke a crisis, while the long run effect is to increase the reserve army of unemployed). Of the classical economists only Adam Smith saw clearly that capital accumulation would eventually create a shortage of labour, and raise wages above the subsistence level.

When the labour surplus disappears our model of the closed economy no longer holds. Wages are no longer tied to a subsistence level. Adam Smith thought they would then depend upon the degree of monopoly (a doctrine which was re-presented in the 1930’s as one of the novelties of modern economic analysis). The neo-classicists invented the doctrine of marginal productivity. The problem is not yet solved to anyone’s satisfaction, except in static models which take no account of capital accumulation and of technical progress. It is, however, outside the terms of reference of this essay and we will not pursue it here. (¶ 8)

This is the final section of Lewis’ account of the closed economy. The first paragraph of [C] is quite remarkable because to the best of my knowledge, Lewis resists the urge to read Malthus back into Smith and to see a sharp distinction between Ricardo and Smith on this point.+

Because I have gone long enough, I won’t try show today that Lewis is right about Smith.+ But crucially for Smith it’s possible for an economy to get into a positive growth cycle of capital accumulation where despite the prevalence of continuous productivity improvements and technological development of labor saving devices, the working population is not immiserated.

Lewis then claims that once wages are unmoored from subsistence they depend on monopoly in Smith. I am unsure why Lewis states this. But I will think about it. So, I owe you an exploration of this claim.

The last passage occurs in Lewis’ treatment of an open economy.

[D] Of course if labour is a free good but the two industries use some scarce resource, such as land or capital, the comparison has to be made not in terms of labour cost but in terms of the scarce resource. Thus, even though labour is unemployed, it may be more economic to use capital to increase the production of food than to use it in creating new manufacturing industries. Adam Smith was as usual on the ball; this was the substance of his argument that a tariff could not raise the national income even if it increased employment, since it would simply be diverting capital from more to less productive uses. (The Keynesian model doesn’t help, since it assumes unlimited capital as well as unemployment). (¶ 8)

That Lewis is not a Keynesian is clear throughout the paper. As he tells us early in the argument, “Hence, from the point of view of countries with surplus labour, Keynesianism is only a footnote to neoclassicism-albeit a long, important and fascinating footnote.” (¶ 1)

Passage [D] helps explain one of Lewis’ most striking policy suggestions in his Summary at the end. I quote the last most un-Smithian sentence of the article, “the Law of Comparative Costs is just as valid in countries with surplus labour as it is in others. But whereas in the latter it is a valid foundation of arguments for free trade, in the former it is an equally valid foundation of arguments for protection.”

But stay tuned. Because I hope it is clear that Eric Williams’ respectful and sophisticated engagement with Smith in Capitalism & Slavery is not an isolated example. Rather, one of the most important development economist of the twentieth century was explicitly reviving Smith against the new economics of his age as he was proposing and offering policy to the decolonial former revolutionaries of the twentieth century.

Speaking as a philosopher of social science: one might say, then, that Lewis had diagnosed a Kuhn-loss as an intellectual arbitrage opportunity when classical economics had been displaced through the marginalist revolution and then the Keynesian one.

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*Smith’s account of profit is a bit murky actually. But in the same chapter he goes on to note that productive labor doesn’t just contribute to profit but also to rents.

+Because Smith’s account of the steady-state situation of wealthy China — the paradigmatic closed economy — with its impoverished population is so striking, it’s natural to miss that for Smith thinks China represents a policy and perhaps institutional failure.