Final Assignment for Econ 196: Simulating Krugman on Lewis on the Development of Underdevelopment

Students do before 2026-05-03 Su: what I am doing about my feeling that teaching econ without data science is now professional malpractice…

My fervent hope is that within five years, Berkeley can get itself to a place in which every student graduating can do this kind of thing, at least, no matter whether they are humanities, social sciences, or natural sciences majors.

But it is an open question whether I will be able to get my Econ 135 students next spring, all up to the point where they can do these kinds of exercises. I may well find myself shying at the jump and not even trying when it comes time:

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The Start of the Assignment:

Do before the end of 2026-05-03 Su <https://bcourses.berkeley.edu/courses/1551896/assignments/9071605>:

Good luck!

Share DeLong’s Grasping Reality: Economy in the 2000s & Before

NOTES: How Did a Globalized World Become so Unequal?

Would it have happened even had there been no “institutional” differences? W. Arthur Lewis says “yes”…

The W. Arthur Lewis Argument

Back in 1875:

  • A person needs roughly 500 lbs of grain equivalent per year for basic subsistence. So:

    • A “First World” farm family output: ~10,000–13,000 lbs → supports 20–26 people at subsistence, or a family of 5–6 with large surplus for market

    • A “Third World” farm family output: ~1,500–1,900 lbs → supports 3–4 people at subsistence, leaving little or no surplus

  • Lewis’s punchline:

    • The tropical farm family is producing near subsistence.

    • The surplus that could fund industrialization—the surplus that did fund First World industrialization —simply isn’t there.

    • Trade doesn’t help (much): the terms of trade for whatever tropical surplus does exist are set by the opportunity cost of tropical labor (near-subsistence agriculture):

      • Not “exploitation”, but “unequal exchange”

Where Did the 12000-to-1800 Agricultural Productivity Gap Come From?

  • West-European marriage pattern changing Malthusian setpoint

  • “Ghost acreage” from imperialism and settler colonialism

  • Animal and legume nitrogen—the “agricultural revolution”

  • India and China in the downphase of the Malthusian cycle

    • But why do India and China matter for the rest of the tropical world?

    • Steamship -> migration -> labor-market competition from immigrants

    • -> labor market-competition from migration to elsewhere that produced competitive goods

    • Examples: rubber: Brazil vs. Malaysia; coffee: Yemen vs. Costa Rica vs. Indonesia

Shouldn’t World Trade Help?

  • The steamship brings not just migration in from China and India but the ability to sell to the rich temperate core markets.

  • But, Lewis says, this doesn’t matter.

  • Competion sets the factoral terms of trade, and labor surplus in China and India makes tropical goods cheap.

The Agricultural Surplus Drives Everything

  • The First World farm family producing 12,000 lbs has ~8,000–10,000 lbs above subsistence to sell, invest, or be taxed.

  • That surplus funds: railways, schools, machinery, banks, urban infrastructure, and the domestic market that makes industrialization viable.

  • Industrialization requires a home market: you learn to manufacture by selling in a protected home market first, and a home market requires farm families with purchasing power above subsistence.

  • The tropical countries were offered trade instead of industrialization—and took it, because trade was immediately profitable given their labor costs: exporting cotton, tea, rubber, and cocoa generated cash income above the subsistence baseline but locked them into the structural trade pattern.

  • Demand for primary products relatively inelastic -> technological progress lowers prices, with extra surplus going to users-consumers.

  • Demand for secondary (industrial) products relatively elastic -> technological progress increases quantity, with extra surplus going to sellers-producers.

Ways to Approach Filling the Hole in Lewis’s Argument

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Krugman’s Model-Building

  • Krugman the master of this kind of model-building…

Avinash Dixit (1992): In Honor of Paul Krugman: Winner of the 1991 John Bates Clark Medal <https://web.mit.edu/krugman/www/dixit.html>: ‘Here is Paul’s typical modus operandi. He spots an important economic issue coming down the pike months or years before anyone else. Then he constructs a little model of it, which offers some new and unexpected insight. Soon the issue reaches general attention, and Krugman’s model is waiting for other economists to catch up. Their reaction is generally a mixture of admiration and irritation.

[Krugman’s] model is wonderfully clear and simple. But it leaves out so much, and relies on so many special assumptions including specific functional forms, that they don’t think it could possibly do justice to the complexity of the issue. Armies of well-trained economists go to work on it, and extend and generalize it to the point where it would get some respect from rigorous theorists. In this process they do contribute some new ideas and find some new results.

But, as a rule, they find something else. Krugman’s special structure was so well chosen that most of its essential insights survive all the extension and generalization. His special assumptions go to the heart of the problem, like a narrow and sharp stiletto. By contrast the followers’ work often resembles thoracic surgery, involving much clumsy breaking of ribs; sometimes it proves to be no more than an autopsy…

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[What Krugman’s “economic environment” argument is, why and how I try to get students to grasp it and work with it in this assignment, below the fold]

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