Every branch of knowledge isconstructed with well-built and powerful theoretical background. The subjectswithout theoretical background will have to face much critics and its existencewill be more problematic. In Economics the theory is much important because toexplain, to predict, to frame policies, to judge economic performance, and as atool to measure economic phenomena the theories is using in large extend.
Inresearch, the theoretical background will provide the existing knowledge onselected field of study. Thus theoretical background will pave the way toconstruct the idea based on the finding of the study, that whether the study isactually supporting the existing theories or it brings new facts of knowledgein the branch of subject. The vast theoreticaland empirical arguments in favor of industrlisation in economic development canbe summarized as follows: Simon Kuznets (1973) has definedeconomic growth as long term rise in capacity to supply increasingly diverseeconomic goods and services to people. This growing capacity is based oninstitutional, ideological adjustments and advancing technology. Kuznets hashighlighted six main characteristics for modern economic growth.
These sixcharacteristics if fulfilled can lead a country towards development.High per capita product and ofpopulation in the developed countries, the rate of increase in productivitye.g., output per unit of all inputs. The third and the most importantcharacteristics is the rate of structural transformation means shift away fromagricultural to non agricultural activities and from industry to services. Thisshift will lead to corresponding change in the occupational status of labour.The fourth one is urbanization and secularization. Fifth the economicallydeveloped country with good roads and transport has the propensity to link withthe rest of world.
Sixth and last characteristics are spread of modern economicgrowth. Kuznets had also highlighted the role of science as a basis ofadvancing technology. The main argument is that there is a significantinterrelationship between all six characteristics. The overall aim of theauthor was to sketch the major characteristics of modern economic growth whichhas been described by author through six major characteristics of economicgrowth. Lewis starts the theory with the argument that theclassical theory of perfectly elastic supply of labour at a subsistence wagehold true in the case of number of underdeveloped countries.
The subsistencewage is determined by the minimum earning required for subsistence and thecapitalists wage will be 30% more than the subsistence wage. Lewis believesthat the capital formation depends upon capital surplus. The marginalproductivity of labour in the capitalist sector is higher than the capitalistwage, this result in capitalist surplus. This surplus is reinvested in newcapital assets. There will be a transfer of labour from the subsistence sectorto capitalist sector.
Capital formation takes place and as a consequenceemployment and economic development takes place. This process continues tillthe labour ratio rises and the supply of labour become inelastic and thesurplus labour disappears. Lewis believe that if technical progress is capitalsaving, it may be considered as an increment in capital and if it is a laboursaving, it may be considered as an increment in the marginal productivity oflabour. He says that the capital is not only created from the profit but alsothrough the bank credit.
In underdeveloped economy, rich in resource and lackof capital the credit creation from banks also have the same effect of capitalformation from profit. Lewis accepts the role of state that it can accumulatecapital even faster than the capitalists and also can tax the subsistencesector. Lewis also states that there will be an end to the growth process.
As aresult of capital 74 accumulation, if there is no surplus labour is present orhigher increase in the real wage that decreases the profit of capitalists leadsto end the economic growth. Gerschenkron (1962) explains that all nations wereonce backward. He accepts that the industrialization is the base of economicgrowth. To move from traditional to modern industrial economy Gerschenkronsuggest a great spurt is needed.
But he criticizes Rostow’s view that theexistence of necessary pre condition for industrialization. To prove this hesays for a great spurt of industrialization, the advanced nations start firststage of development with the factory in the organizational lead, moderatelybackward country with banks and extreme backward with government. Here is nopre condition for industrialization and one precondition may substitute byother precondition.
Pre condition may be even created during the course ofindustrialization. To reduce foreign competition in backward countries, theyestablish techniques, import substitution and use of capital intensivetechniques because of low level skilled laborers. Thus the borrowed technologyis one of the prime factors of high speed economic development in backwardeconomies. He says the great spurt of industrialization will take place only ifthe five pre requisites were full filled and they are (1) old frame ofagriculture should be abolished or increase in production (2) an influentialmodern elite should be created (3) provision for material social overheadcapital (4) value system in favor of economic change (5) an effectiveentrepreneurship.