Generalizing Lewis: Unlimited Supplies of Labor in the Advanced Capitalist World^☆

This chapter develops one aspect of W. Arthur Lewis’s work admirably summarized and placed in context in Mauro Boianovsky’s lead article in this symposium: the relevance of Lewis’s seminal paper (1954) to the advanced capitalist world. Lewis asserted that because Keynes assumed that capital does not constrain output, The General Theory offered nothing new with respect to the economics of a labor-surplus economy (1954, pp. 139–140). I argue he was wrong: that unlimited supplies of labor are key to a Keynesian theory of the long run.

By Keynesian theory I mean one in which aggregate demand matters – not instead of supply but in addition. I am aware that “long-run Keynesian theory” is generally considered to be an oxymoron. The process of consolidating the Keynesian revolution made a role for aggregate demand contingent on one form or another of market imperfection or friction, and the resulting sand in the wheels was supposed to operate in the short term, not over the long run. By the late 1960s, when the neoclassical counter-revolution had begun in earnest, the Keynesians had already abandoned the long run to the neoclassicals. Robert Solow’s 1956 essay (Solow, 1956) was widely understood to have demonstrated the irrelevance of aggregate demand, even though the “demonstration,” as Solow himself recognized (p. 91), is simply an assumption. In the standard “New Keynesian” model aggregate demand can have a transitory effect on the economy, but the effect dissipates as the economy returns to long-run equilibrium.