Dual-sector Model - Capital Accumulation

Capital Accumulation

The process of economic growth is inextricably linked to the growth of capitalist surplus, that is as long as the capitalist surplus increases, the national income also increases raising the growth of the economy. The increase in capitalist surplus is linked to the use of more and more labor which is assumed to be in surplus in case of this model. This process of capital accumulation does come to an end at some point.

This point is where capital accumulation catches up with population so that there is no longer any surplus labor left. Lewis says that it the point where capital accumulation comes to a stop can come before also that is if real wages rise so high so as to reduce capitalists' profits to the level at which profits are all consumed and there is no net investment.

This can take place in the following ways:
1. If the capital accumulation is proceeding faster than population growth growth which causes a decline in the number of people in the agricultural or subsistence sector.

2. The increase in the size of the capitalist or industrial sector in comparison to the subsistence sector may turn the terms of trade against the capitalist sector and therefore force the capitalists to pay the workers/laborers a higher percentage of their product in order to keep their real income constant.

3. The subsistence sector may adopt new and improved methods and techniques of production, this will raise the level of subsistence wages in turn forcing an increase in the capitalist wages. Thus both the surplus of the capitalists and the rate of capital accumulation will then decline.

4. Even though the productivity of capitalist sector remains unchanged, the workers in the capitalist sector may begin to imitate the capitalist style and way of life and therefore may need more to live on, this will raise the subsistence wage and also the capitalist wage and in turn the capitalist surplus and the rate of capital accumulation will decline.