Who was Simon Kuznets?

Simon Kuznets was a Russian-American economist and Nobel laureate, who is best known for the Kuznets curve, his work on the relationship between inequality and economic growth, and his pioneering efforts to measure national income.

The Kuznets Curve

Simon Kuznets hypothesized that as an economy industrializes, the economic inequality within it first increases and then decreases.

According to the hypothesis, during the early stages of economic development, the opportunities for investment increase for those who have capital, leading to an increase in wealth for them. At the same time, more labour move from rural to urban areas, leading to an availability of cheap labor, thus keeping wages low for the working class. This widens the income gap and increases inequality. Eventually, inequality reaches its highest level. At this point, the incentive for workers to invest in their human capital e.g. by pursuing higher education and learning new skills, and the rise of a welfare state that redistributes of wealth from the rich to the poor e.g. through taxation and investment in public goods, results in the emergence of a middle class. This effectively reduces the economic inequality in the society.

GNP and National Income Measurement

In the 1930’s, the policies designed in response to the Great Depression and the measurement of their success was based on fragmented and unreliable data. To address this, Simon Kuznets was commissioned to produce a system that recorded what was happening in the economy. In 1937, Kuznets presented to the U.S. Congress his report “National Income, 1929-35”. In this report, he tried to record all economic production in the nation, by individuals, companies, the government etc., in one economic measure, this measure would rise with increasing economic activity and fall with decreasing economic activity. This measure laid the basis of Gross National Product (GNP) as we know it.

His work on national income was based on statistics that went back as far as 1869, and was so comprehensive that his method became the standard in the field. His book, “National Income and Its Composition, 1919-1938” is amongst the most significant works on GNP. However, Kuznets believed national income statistics were not a good way to measure a country’s success and remarked, “The welfare of a nation can scarcely be inferred from a measurement of national income.”

Legacy

Simon Kuznets won the Nobel Prize "for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and social structure and process of development“. The Environmental Kuznets Curve, a modification of the Kuznets Curve derived by economists Gene Grossman and Alan Kruger, shows the increase and the subsequent decrease in pollution levels in developing economies. The basic idea behind the EKC is similar to the Kuznets Curve. His work in improving quantitative economics and econometrics is considered to be instrumental in fuelling the “Keynesian Revolution”.

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About The Author

Wajhie Imtiyaz

Wajhie Imtiyaz is currently a student of economics at the university of Nottingham Malaysia campus. He believes a contentment is the ultimate goal of life. He also likes to read futurology in his free time.