Piketty & the Bell Curves

This isn’t the Bell Curve we’re fighting about (and neither is intelligence):

The Bell Curve

The Bell Curve: Intelligence and Class Structure in American Life

You can preview Capital in the Twenty-First Century at Google Books. I decided to read some Piketty after reading Stross on Piketty [h/t Grasping Reality]. There, learning about the World Top Incomes Database & the optimistic hypothesis of Kuznets.

Kuznets curve

That looks like a bell curve. Indeed it is — essentially, Piketty provides a radical reconsideration (and expansion) of income tax data that hasn’t been done since Kuznets, that broadens

…the spatial and temporal limits of Kuznets’s innovative and pioneering work on the evolution of income inequality in the United States between 1913 and 1948. In this way I have been able to put Kuznets’s findings (which are quite accurate) into a wider perspective and thus radically challenge his optimistic view of the relation between economic development and the distribution of wealth. Oddly, no one has ever systematically pursued Kuznet’s work, no doubt in part because the historical and statistical study of tax records falls into a sort of academic no-man’s-land, too historical for economists and too economistic for historians. That is a pity, because the dynamics of income inequality can only be studied in a long-run perspective, which is possible only if one makes use of tax records.19

Read the full introduction here, but this is worth quoting:

Malthus, Ricardo, Marx, and many others had been talking about inequalities for decades without citing any sources whatsoever or any methods for comparing one era with another or deciding between competing hypotheses. Now, for the first time, objective data were available. Although the information was not perfect, it had the merit of existing. What is more, the work of compilation was extremely well documented: the weighty volume that Kuznets published in 1953 revealed his sources and methods in the most minute detail, so that every calculation could be reproduced. And besides that, Kuznets was the bearer of good news: inequality was shrinking.

The Kuznets Curve: Good News in the Midst of the Cold War

In fact, Kuznets himself was well aware that the compression of high US incomes between 1913 and 1948 was largely accidental. It stemmed in large part from multiple shocks triggered by the Great Depression and World War II and had little to do with any natural or automatic process. In his 1953 work, he analyzed his series in detail and warned readers not to make hasty generalizations. But in December 1954, at the Detroit meeting of the American Economic Association, of which he was president, he offered a far more optimistic interpretation of his results than he had given in 1953. It was this lecture, published in 1955 under the title “Economic Growth and Income Inequality,” that gave rise to the theory of the “Kuznets curve.”

According to this theory, inequality everywhere can be expected to follow a “bell curve.” [&myemph; See also “The Double Bell Curve of Global Growth”] In other words, it should first increase and then decrease over the course of industrialization and economic development. According to Kuznets, a first phase of naturally increasing inequality associated with the early stages of industrialization, which in the United States meant, broadly speaking, the nineteenth century, would be followed by a phase of sharply decreasing inequality, which in the United States allegedly began in the first half of the twentieth century.

Kuznets’s 1955 paper is enlightening. After reminding readers of all the reasons for interpreting the data cautiously and noting the obvious importance of exogenous shocks in the recent reduction of inequality in the United States, Kuznets suggests, almost innocently in passing, that the internal logic of economic development might also yield the same result, quite apart from any policy intervention or external shock. The idea was that inequalities increase in the early phases of industrialization, because only a minority is prepared to benefit from the new wealth that industrialization brings. Later, in more advanced phases of development, inequality automatically decreases as a larger and larger fraction of the population partakes of the fruits of economic growth.14

The “advanced phase” of industrial development is supposed to have begun toward the end of the nineteenth or the beginning of the twentieth century in the industrialized countries, and the reduction of inequality observed in the United States between 1913 and 1948 could therefore be portrayed as one instance of a more general phenomenon, which should theoretically reproduce itself everywhere, including underdeveloped countries then mired in postcolonial poverty. The data Kuznets had presented in his 1953 book suddenly became a powerful political weapon.15 He was well aware of the highly speculative nature of his theorizing.16 Nevertheless, by presenting such an optimistic theory in the context of a “presidential address” to the main professional association of US economists, an audience that was inclined to believe and disseminate the good news delivered by their prestigious leader, he knew that he would wield considerable influence: thus the “Kuznets curve” was born. In order to make sure that everyone understood what was at stake, he took care to remind his listeners that the intent of his optimistic predictions was quite simply to maintain the underdeveloped countries “within the orbit of the free world.”17 In large part, then, the theory of the Kuznets curve was a product of the Cold War. [&myemph:]

To avoid any misunderstanding, let me say that Kuznets’s work in establishing the first US national accounts data and the first historical series of inequality measures was of the utmost importance, and it is clear from reading his books (as opposed to his papers) that he shared the true scientific ethic. In addition, the high growth rates observed in all the developed countries in the post–World War II period were a phenomenon of great significance, as was the still more significant fact that all social groups shared in the fruits of growth. It is quite understandable that the Trente Glorieuses fostered a certain degree of optimism and that the apocalyptic predictions of the nineteenth century concerning the distribution of wealth forfeited some of their popularity.

Nevertheless, the magical Kuznets curve theory was formulated in large part for the wrong reasons, and its empirical underpinnings were extremely fragile. The sharp reduction in income inequality that we observe in almost all the rich countries between 1914 and 1945 was due above all to the world wars and the violent economic and political shocks they entailed (especially for people with large fortunes). It had little to do with the tranquil process of intersectoral mobility described by Kuznets.

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