Who Was He and What Is the Kuznets Curve?

Who Was Simon Kuznets?

Simon Kuznets, a Russian-American development economist and statistician, was awarded the 1971 Nobel Memorial Prize in Economics for his research on economic growth. He set the standard for national income accounting, enabling accurate estimates of gross national product to be calculated for the first time.

Understanding Simon Kuznets

Simon Kuznets set the standard for national income accounting—funded by the nonprofit National Bureau of Economic Research. His measures of savings, consumption and investment helped advance Keynesian economics and advanced the study of econometrics. He also helped lay the foundation for the study of trade cycles, known as “Kuznets cycles,” and developed ideas about the relationship between economic growth and income inequality.

Kuznets was born in Ukraine in 1901, and moved to the U.S. in 1922. He earned his Ph.D. from Columbia University and was a professor of economics and statistics at the University of Pennsylvania (1930-54), a professor of political economy at Johns Hopkins (1954-60), and a professor of economics at Harvard (1960-71). He died in 1985 in Cambridge, MA.

Kuznets Curve

Kuznets’ work on economic growth and income distribution led him to hypothesize that industrializing nations experience a rise and subsequent decline in economic inequality, characterized as an inverted “U”—the “Kuznets curve.”

He thought economic inequality would increase as rural labor migrated to the cities, keeping wages down as workers competed for jobs. But according to Kuznets, social mobility increases again once a certain level of income was reached in “modern” industrialized economies, as the welfare state takes hold.

However, since Kuznets postulated this theory in the 1970s, income inequality has increased in advanced developed countries—although inequality has declined in fast-growing East Asian countries.

Environmental Kuznets Curve

A modification of Kuznets curve has become popular to chart the rise and subsequent decline in pollution levels of developing economies. First developed by Gene Grossman and Alan Krueger in a 1995 NBER paper and later popularized by the World Bank, the environmental Kuznets curve follows the same basic pattern as the original Kuznets curve.

Thus, environmental indicators deteriorate as an economy industrializes until a turning point is reached. The indicators then begin improving again with the aid of new technology and more money that is funneled back to society to improve the environment.

There is mixed empirical evidence to prove validity of the environmental Kuznets curve. For example, carbon emissions have steadily risen for both developed and developing economies. The development of modern carbon trading infrastructure also means that developed economies are not actually reducing pollution but exporting it to developing economies, which are also involved in producing goods for them.

That said, certain types of pollutants declined as an economy industrialized. For example, sulphur dioxide levels decreased in the United States with increased regulation even as the number of cars on its roads held steady or increased.

Evidence and Criticism of Kuznets Curve

Empirical evidence of Kuznets curve has been mixed. The industrialization of English society followed the curve’s hypothesis. The Gini coefficienta measure of inequality in society, in England rose to 0.627 in 1871 from 0.400 in 1823. By 1901, however, it had fallen to 0.443. The rapidly-industrializing societies of France, Germany, and Sweden also followed a similar trajectory of inequality around the same time.

But Netherlands and Norway had a different experience and inequality declined, for the most part, consistently as their societies transitioned from agrarian economies to industrial ones. The East Asian economies – Japan, South Korea, and Taiwan – also witnessed a constant decline in their inequality numbers during their periods of industrialization.

Different theories have been put forward to explain these anomalies. Some ascribe it to cultural quirks. That explanation, however, does not account for the experiences of Netherlands and Norway in contrast to the rest of Europe.

Others have focused on development of political systems that enabled rapid redistribution of wealth. For example, Daron Acemoglu and James Robinson posited that the inequality due to capitalist industrialization contained “seeds of its own destruction” and gave way to political and labor reform in Britain and France, enabling redistribution of wealth.

In East Asian economies land reforms that occurred in the 1940s and 1950s helped pave the way for equitable redistribution even though political reform was delayed. In other words, it was politics, and not economics as Kuznets suggested, that determined inequality levels.

When he defined the concept, Kuznets himself suggested that there was much more work to be done and data to be collected in order to conclusively prove the relationship between economic development and inequality.