Capital and Labor in the 21st Century: A Cautionary Tale

Transcript of the 19th Sir Arthur Lewis Memorial Lecture

Source: Eastern Caribbean Central Bank

Author: Peter Blair Henry

From the document:

Things have come full circle. Indeed, capital plays a central role in my lecture today. But instead of examining the impact of capital market liberalization on capital accumulation as I did that summer, I want to focus on the ongoing relevance of Lewis’s work as it illuminates an important connection for labor in the 21st century, between two simultaneous but otherwise seemingly unrelated trends: the coming boom in the working age population of developing countries and creeping anticapitalist
sentiment.

In Lewis’s celebrated dual-sector model, unlimited supplies of labor drive profits; profitability drives capital accumulation; and capital accumulation in turn drives employment. This causal flow of action hangs on two critical assumptions. The first is that owners of capital in the manufacturing sector of the economy face a perfectly elastic labor supply curve. For long periods of time, they are able to hire as many workers as they want at a 30 percent premium over the traditional sector subsistence
wage.