First, the model implicitly assumes that the rate of labor transfer and employment creation in the modern sector is proportional to the rate of modern-sector capital accumulation. The faster the rate of capital accumulation, the higher the
growth rate of the modern sector and the faster the rate of new job creation. But what if capitalist profits are reinvested in more sophisticated laborsaving capital equipment rather than just duplicating the existing capital as is implicitly assumed
in the Lewis model? (We are, of course, here accepting the debatable assumption that capitalist profits are in fact reinvested in the local economy and not sent abroad as a form of “capital flight” to be added to the deposits of Western banks.)
Figure 3.2 reproduces the lower, modern-sector diagram of Figure 3.1a, only this
time the labor demand curves do not shift uniformly outward but in fact cross. Demand
curve D2(KM2) has a greater negative slope than D2(KM1) to reflect the fact that
additions to the capital stock embody laborsaving technical progress—that is, KM2
technology requires much less labor per unit of output than KM1 technology does.