The Big Push: A

Graphical Model
 Assumptions

• Factors: We assume that there is only one factor of

production—labor. It has a fixed total supply, L.
• Factor payments: The labor market has two sectors. We assume that
workers in the traditional sector receive a wage of 1 (or normalized to
1, treating the wage as the numeraire; that is, if the wage is 100
rupees per day, we simply call this amount of money “1” . Workers in
the modern sector receive a wage W 7 1.
• Technology: We assume that there are N types of products, where N is a large
number.
o For each product in the traditional sector, one worker produces one unit of output.
This is a very simple example of constant-returns to- scale production.
o In the modern sector, there are increasing returns to scale
o The labor requirements for producing any product in the modern sector take the
form L = F + cQ, where c < 1 is the marginal labor required for an extra unit of
output.
• Domestic demand: We assume that each good receives a constant and
equal share of consumption out of national income. The model has
only one period and no assets; thus there is no saving in the
conventional sense. As a result, if national income is Y, then
consumers spend an equal amount, Y/N, on each good.
• International supply and demand: We assume that the economy is
closed. This makes the model easy to develop.
Conditions for Multiple Equilibria
To begin, suppose that we have a traditional economy with no
modern production in any market.
• A potential producer with modern technology (i.e., a
technology with fixed costs and increasing returns) considers
whether it is profitable to enter the market.
• Given the size of the fixed cost, the answer depends on two
considerations: (1) how much more efficient the modern sector
is than the traditional sector and
(2) how much higher wages are in the
modern sector than in the traditional sector.
• production functions are represented for the two types of firms
.
• The traditional producers use a linear technique with slope 1,
with each worker producing one unit of output.
• The modern firm requires F workers before it can produce
anything, but after that, it has a linear technique with slope 1/c
.
• Price is 1, so revenues PQ can be read off the Q axis.
• For the traditional firm, the wage bill line lies coincident with
the production line (both start at the origin and have a slope of
1).
• For the modern firm, the wage bill line has slope W 7 1.
• At point A, we see the output that the modern firm will
produce if it enters, provided there are traditional firms
operating in the rest of the economy. Whether the modern firm
enters depends, of course, on whether it is profitable to do so.
• first consider a wage bill line like W1 passing below point A.
With this relatively low modern wage, revenues exceed costs,
and the modern firm will pay the fixed cost F and enter the
market.
• In general, this outcome is more likely if the firm has lower
fixed costs or lower marginal labor requirements as well as if
it pays a lower wage.
• By assumption, production functions are the same for each
good, so if a modern firm finds it profitable to produce one
good, the same incentives will be present for producing all
goods, and the whole economy will industrialize through
market forces alone; demand is now high enough that we end
up at point B for each product
• This shows that a coordination failure need not always
happen: It depends on the technology and prices (including
wages) prevailing in the economy.
• If a wage bill line like W2 holds, passing between points A and B, the firm
would not enter if it were the only modern firm to do so in the economy
because it would incur losses.
• But if modern firms enter in each of the markets, then wages are
increased to the modern wage in all markets, and income expands.
• We may assume that price remains 1 after industrialization. Note that the
traditional technique still exists and would be profitable with a price
higher than 1.
• So to prevent traditional firms from entering, modern firms cannot raise
prices above 1.24 The modern firm can now sell all of its expanded
output (at point B), produced by using all of its available labor allocation
(L/N), because it has sufficient demand from workers and entrepreneurs
in the other industrializing product sectors.
• As can be seen , with prevailing wage W2, point B is profitable after
industrialization because it lies above the W2 line. Workers are also at
least as well off as when they worked in the traditional sector because
they can afford to purchase an additional quantity of goods in proportion
to their increased wage, and they have changed sectors voluntarily.
• All of the output is purchased because all of national income is spent on
output; national income is equal to wages plus profits, the value of which
is output of each product times the number of products N.
• Thus with a prevailing wage like W2, there are two equilibria:
one in which producers with modern techniques enter in all
markets, and profits, wages, and output are higher than before;
and one in which no modern producer enters, and wages and
output remain lower.
• The equilibrium with higher output is unambiguously better,
but in general, the market will not get there by itself.
• A final possibility is found in a wage bill line like W3, passing
above point B.
• In this case, even if a modern producer entered in all product
sectors, all of these firms would still lose money, so again the
traditional technique would continue to be used.
• In general, whenever the wage bill line passes below
point A, the market will lead the economy to modernize,
and whenever it passes above A, it will not.
• The steeper (i.e., more efficient) the modern-sector
production technique or the lower the fixed costs, the
more likely it is that the wage bill will pass below the
corresponding point A.
• If the line passes above B, it makes no sense to
industrialize. But if the wage line passes between points
A and B, it is efficient to industrialize, but the market
will not achieve this on its own.
• Be sure to note that these are three different wages that
might exist depending on conditions in a particular
economy at one point in time, not three wages that occur
successively.
• Again, the problematic cases occur when the wage bill line
passes between A and B, thus creating two equilibria: one in
which there is industrialization and the society is better off
(point B) and one without industrialization (pointA).
• However, the market will not get us from A to B because of a
coordination failure.
• In this case, there is a role for policy in starting economic
development.
• There is no easy test to determine where a traditional
economy, such as Mozambique, is located on this continuum.
But at least we can begin to understand why development
often has not gotten under way, even when technology was
available.
Other Cases in Which a Big Push May Be
Necessary
•Intertemporal effects
•Urbanization effects
•Infrastructure effects
•Training effects