16 October 1979

THIS YEAR’s ECONOMICS PRIZE AWARDED TO DEVELOPING-COUNTRY RESEARCH

The Royal Swedish Academy of Sciences has decided to award the 1979 Alfred Nobel Memorial Prize in Economic Sciences to be shared by

Professor Theodore W. Schultz, University of Chicago, USA,
and
Professor Sir Arthur Lewis, Princeton University, USA,

for their pioneering research into economic development research with particular consideration of the problems of developing countries.

Schultz as Agricultural Economist
Theodore W. Schultz was an agricultural economist to start with, and in the thirties and forties, presented a series of studies on the crises in American agriculture, and then later took up agricultural questions in various developing countries throughout the world. His best known works from this period are Agriculture in an Unstable Economy (1945), and Production and Welfare of Agriculture (1949). His most trail-blazing book was Transforming Traditional Agriculture (1964). The main characteristic of Schultz’s studies in agricultural economics is that he does not treat agricultural economy in isolation, but as an integral part of the entire economy. Schultz’s analytical interest has been focused on the imbalance between relative poverty and underdevelopment in agriculture compared with the higher productivity and the higher income levels in industry and other urban economic activities – and this applies both to industrialized countries like the United States and to the many developing countries Schultz has studied.

Schultz has received many of the impulses for his notable analysis of the importance of human resources for economic and social development from his studies of the productivity problems in agriculture – in the United States as well as in the developing world.

Schultz’s analysis of the development potential of agriculture is based on a disequilibrium approach. It is the gap between, on the one hand, traditional production methods, and on the other, the more effective methods now available which create the conditions necessary for a dynamic development. Using this approach, Schultz has, in various context, presented a detailed critique of the developing countries’ industrialization policies and their neglect of agriculture. Schultz was the first to systematize the analysis of how investments in education can affect productivity in agriculture as well as in the economy as a whole. Well aware of the limitations of the method, Schultz has, as a first approximation, defined and measured the size of educational capital as a sum of accumulated investments in education. A large proportion of the costs of these education investments consist of a loss of earnings from employment during study periods. These are, therefore, a kind of alternative costs which can be seen both in the private and in the national context.

Schultz on the Human Factor
Schultz and his students have shown that, for a long time, there has been a considerably higher yield on “human capital” than on physical capital in the American economy, and that this tension has resulted in a much faster expansion of educational investments than of other investments.

Schultz has always kept close to economic reality in his work, both as an economic researcher, and as an adviser in various capacities. He has shown a great wisdom as an economist with a striking ability to define development factors which the model-building economists are inclined to neglect.

But the broadness of his approach is also manifest in a number of other factors and context which have to do with human resources (the human factor). Schultz has done research on subjects connected with health and disease as essential factors in economic development in the Third World, as well as on population issues in general. During his long career in research, he has shown an outstanding skill in asking the relevant questions and has opened up fruitful avenues of new research. Few economists have done so much to inspire colleagues and students to do worthwhile research.

Lewis on Poverty in the Developing Countries
Arthur Lewis is a leading figure and pioneer in developing country research. His fundamental works from the middle of the fifties – Economic Development with Unlimited Supplies of Labour (1954), and Theory of Economic Growth (1955) – have been followed by a series of other important works. The most significant of these are his Wicksell Lectures of 1969 (Aspects of Tropical Trade, 1883-1965), and his latest great book, Growth and Fluctuations, 1870-1913 (1978).

Lewis has tackled issues which are basic to the causes of poverty among populations in the developing world and to the unsatisfactory rate of economic development. His two famous theoretical explanatory models, designed to describe and explain the intrinsic problems of underdevelopment, have won great acclaim and given rise to widespread scientific debate which has resulted in a series of variations and additions to Lewis’s original premises.

The models have also been the subject of empirical testing which has confirmed their realistic structure and usefulness.

The first model is based on the dual nature of a developing economy. There is an agricultural sector functioning on traditional lines and primarily based on self-support which engages the labours of the greater part of the population, and a modern market-oriented sector primarily engaged in industrial production. The driving force in the economy stems from the latter sector, which expands with the support of unlimited supplies of labour by migration from the agricultural sector, and workers accept the low wages corresponding to the living standards and conventions in an underdeveloped agriculture. The profits in the modern sector (“capitalist sector”) create the growing savings which finance the capital formation for expansion.

Lewis’s other basic model relates to the determination of the terms of trade between developing and developed countries as regards raw materials and tropical products, on the one hand, and industrial products, on the other. Here, again, it is a question of a simple model of a classical pattern. Two groups of countries – south and north, poor and rich – each produce two kinds of products, one of which they have in common, namely, food. The other two products – in the model called “coffee” and “steel” – are traded. Lewis shows how under specific conditions, the terms of trade are determined by the relationship between the work productivity in agriculture in the developing countries and in the developed countries. According to this analysis model, the relatively much lower productivity in agriculture in the developing countries compared with the rich countries is the determining factor in the current terms of trade between the two groups of countries, i.e., the long-term development of the terms of trade.

One interesting thing about Lewis’s greatly simplified model analysis is that it presents essential aspects of the reasons for the poverty and development problems of the developing countries, and another is that it can be integrated into a many-faceted picture of the historical and statistical development patterns in different countries of the Third World.

The experience he has gained from his numerous assignments as economic adviser, and as the administrator of a large development bank, has given him great insight into the way politicians and dictators function. So he is on firm ground for tackling a realistic analysis of the possibilities of economic policy. In one of his earliest works from 1949 (The Principles of Economic Planning), and even more so in Politics in West Africa (1965), Lewis has discussed in detail the difficult planning problems – from the standpoint of rational economics – which arise when central planning ignores price signals from a market system. In this context, Lewis has stressed the distinction between “planning by direction” and “planning through the market”. This approach has always been a characteristic of Lewis’s research and is particularly evident in his latest large work (Growth and Fluctuations ). He illustrates the interaction between development in the then-industrialized countries and developing countries during the long period of 1870-1913. Here, Lewis is very much the economic historian – with an extremely scrupulous examination of statistical sources and an impressive reprocessing of the material. In many essential respects he sheds new light on both growth processes and short and long economic cycles within the nucleus of industrialized countries which influenced the development in a periphery of developing countries.

Features in Common
Schultz’s and Lewis’s analysis of development problems have a number of features in common. We see how well their contributions complement one another. First, they have the same points of departure. Economic development — and this includes not only economic growth — is central to the research of both these economists.

Schultz’s work primarily concentrates on a number of strategic questions related to conditions for efficiency in the employment of production resources. Here, Schultz attaches crucial importance to vocational skills, schooling, research and its application. Schultz is a pioneer in research on “human capital”, a field which has been expanding rapidly since the end of the fifties.

The efficiency and development of agriculture is also in Lewis’s opinion of vital importance for the situation and growth of the developing countries. But Lewis has focused attention on the dual nature of developing country economies, the tension between a large, dominating and stationary agricultural sector, and a dynamic industrial sector, which is sometimes in the nature of an enclave. Even in another respect, the low productivity of agriculture is, in Lewis’s analysis, a causal factor for the poverty of the developing countries and a restriction on growth, namely, via effects on the terms of trade with developed industrial countries.

Another feature Schultz and Lewis have in common is the importance they attach to facts and empirical research. They both have extensive practical experience of development problems and apply this in their research. They are both extremely interested in the history of the course and form of development in various eras in different countries. Characteristic of them both is their interest in problems of economic policy. Both are deeply concerned about the need and poverty in the world and engaged in finding ways out of underdevelopment. In this context, both Schultz and Lewis are ready to draw daring conclusions which can lead to recommendations of changed economic policy. They are also very critical of the type of agricultural policy or other economic policy which have been pursued during various phases. Their widespread and profound experience of developing-country economic policies and underlying political systems makes their presentations of developing-country problems vivid and sincere.