Kuznets Waves of Inequality

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Earlier this month I gave a talk at an international conference in Vienna, Austria, The Haves and the Have Nots: Exploring the Global History of Wealth and Income Inequality. The keynote lecture was given by Branko Milanovic, the author of a book, not coincidentally titled The Haves and the Have Nots (in fact, the organizers borrowed the title for the conference).

Branko is one of the best economists working on inequality in the long run. At the very least, he understands the long-term dynamics of inequality better than Piketty (despite the latter having become a household name). Piketty’s theory is essentially that inequality always grows, except when it is knocked down by an exogenous event, such as a world war or a great depression. It’s a bit of a Deus ex Machina explanation, and it doesn’t explain why inequality never becomes too high, unless because something always happens to bring it down, accidental-like.

Milanovic started his talk by describing several alternative views on how economic inequality evolves in the long term. Vilfredo Pareto’s theory was the simplest one: inequality stays constant at a high level. But we now have abundant data to show that this is not correct. Historically, inequality has changed quite dramatically, and thanks to Piketty and coworkers we now have good quantitative data to prove this point.

simon-kuznetsSimon Kuznets

Simon Kuznets thought that the evolution of inequality follows an inverted U-curve. Or what might be called a Λ-curve. Although Kuznets did not have access to high quality data on incomes and wealth, we now know that he was correct in discerning that inequality increased during the second half of the nineteenth century, and then decreased during most of the twentieth century, until roughly 1980, which was of course many years after Kuznets wrote his 1955 article. But only 5 years before his death (I wonder, whether he had been able to comment on this second turn-around).

The rise in inequality in the last 30-40 years demonstrates that the inverted U-curve is not a correct description. This is where Branko steps in with his proposal that the dynamics of inequality is best described as repeated “Kuznets Waves.” The previous one, seen by Kuznets, ended in 1980, and now we are living through the ascending arm of the next one.

Here’s a graph from my forthcoming book on structural-demographic analysis of American history, illustrating this wave-like dynamics:

 inequality

I think Branko is right, because my own historical work suggests that inequality goes up an down in a cyclic fashion. Our data, summarized in Secular Cycles, is of course nowhere near as detailed and quantitative as the data for the post-1800 period, which have been the subject of analysis by Piketty and other economists. However, it indicates that inequality moves in a predictable, cyclic pattern during each secular cycle. And it makes sense, because if inequality always grew, after 5,000 years of state-level complex societies it would have long ago reached the extreme, in which one individual owned all the wealth. This hasn’t happened, which suggests that there could be some kind of a dynamic feedback that would kick in when inequality got too high.

 

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edwardturner

what’s the feedback that stops inequality getting too low? like, below 1% holding 20% of all the wealth – that’s still a highly unequal society in terms of wealth.

since the chart asks us to explain a mere ripple in inequality maybe this is best explained as an elite-level rather than society-as-a-whole dynamic.

how many of us who are not rich have much wealthier great-grandparents (of which most have eight)?

this could be a fingerprint of generational regression to the mean at the elite level.

by 1980 the children, grand-children and great-grand children of America’s richest wealth holders in 1900 had frittered a lot of the estate away among relatives and in their non-productive activities.

the trend reverses because new more frugal families rise to take their place. however, they and their descendants will behave the same way.

why as a whole class of many rich families they behave as “one big family” I don’t know. maybe upon reflection what I have just written won’t make any sense.

SamB

Isn’t that (to some extent) the very function of technological innovation? Other than cash (which is often inflated away over time), wealth and income generation is typically embedded in capital assets.

Such assets derive their value from being able to produce outputs that are valued and that attract a premium from buyers of such outputs (“economic rents” in a sense).

New technology, by introducing new preferences and/or new ways to satisfy existing preferences, devalues such assets to the benefit of both the (mostly) inventors/innovators who introduce and/or broadly disseminate such technologies and (to a lesser extent) the broader population whose wealth can now purchase a greater amount of the desired outputs (thereby increasing the effective “value” of such wealth by improving living standards).

OlgaS

Mr Tourchin, actually this comment was supposed to go to the previous your post Economics Can’t Answer Why Inequality (sometime) Decreases, but bir some reason the site did not accept the CAPTURE there for several times. In the meanwhile I dare considering it reasonable and worth of regarding enough to try it once again here
In fact in the current Age of Propagada of the 20th century( ref Elliot Aranson Age of Propaganda: The Everyday Use and Abuse of Persuasion) the very war may perfectly be endogenous, initiated by that very elite to guide outward, to the outer enemy the negative emotions of the people in order to conserve the local system of inequility. Before the mass media development it did not play that role, but by nowadays “work with pubic opinion”had got that virtuous… the public opinion may be directed to any goal in order to decrease the threat of inner violence.In the modern Russia, for instance. I remember well, 3 years ago nobody could even guess that the war with that close “brother” people of Ukrain could be possible at all. By now most of the common Russian people got sincerely believing those very Ukranians to be some kind of monsters. I could not believe that some of friends of mine could think so indeed – well, some common people might, but not those with the University education! Not in Russia, where it has been known since the Soviet times, that the official medias can never-ever be trusted! Just I had to believe my own ears… All that went on with productive economic falling and enormous increase of inequality inside Russian Federation, So the most realistic reason for the current burning guerilla warfare would be economic and social aturture retarding, the unbalanced Word developent that is inherited from the pre-globalisation, pre-industrial stage

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