Kuznets - Economic Growth and Income Inequality PDF

American Economic Association
Economic Growth and Income Inequality

Author(s): Simon Kuznets
Source: The American Economic Review, Vol. 45, No. 1 (Mar., 1955), pp. 1-28
Published by: American Economic Association
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T h e Ame rican Economic R e v ie w
VOLUME XLV MAR CH, 1955 NUMBER ONE
ECONOMIC GR OWT H AND INCOME INEQUALIT Y*
By
SIMON KUZNET S
T h e ce ntral th e me of th is pape r is th e ch aracte r and cause s of
long-
te rm ch ange s in th e pe rsonal distribution of income . Doe s ine quality
in th e distribution of income incre ase or de cre ase in th e course of a
country's e conomic grow th ? Wh at factors de te rmine th e se cular le v e l
and tre nds of income ine qualitie s?
T h e se are broad que stions in a fie ld of study th at h as be e n plague d
by loose ne ss in de finitions, unusual scarcity of data, and pre ssure s of
strongly h e ld opinions. Wh ile w e cannot comple te ly av oid th e re sulting
difficultie s, it may h e lp to spe cify th e ch aracte ristics of th e size -of-
income distributions th at w e w ant to e xamine and th e mov e me nts of
w h ich w e w ant to e xplain.
Fiv e spe cifications may be liste d. First, th e units for w h ich income s
are re corde d and groupe d sh ould be family-e xpe nditure units, prope rly
adjuste d for th e numbe r of pe rsons in e ach -rath e r th an income re -
cipie nts for w h om th e re lations be tw e e n re ce ipt and use of income can
be w ide ly div e rse . Se cond, th e distribution sh ould be comple te , i.e .,
sh ould cov e r all units in a country rath e r th an a se gme nt e ith e r at th e
uppe r or low e r tail. T h ird, if possible w e sh ould se gre gate th e units
w h ose main income e arne rs are e ith e r still in th e le arning or alre ady in
th e re tire d stage s of th e ir life cycle -to av oid complicating th e picture
by including income s not associate d w ith full-time , full-fle dge d participa-
tion in e conomic activ ity. Fourth , income sh ould be de fine d as it is now
for national income in th is country, i.e ., re ce iv e d by indiv iduals, in-
cluding income in kind, be fore and afte r dire ct taxe s, e xcluding capital
gains. Fifth , th e units sh ould be groupe d by se cular le v e ls of income ,
fre e of cyclical and oth e r transie nt disturbance s.
For such a distribution of mature e xpe nditure units by se cular le v e ls
*
Pre side ntial addre ss de liv e re d at th e Sixty-se v e nth Annual Me e ting of th e Ame rican
Economic Association, De troit, Mich igan, De ce mbe r 29, 1954.
P.....
..
..
Numibe r 56 of a scrics of
pbotograph lIs
of
past pircside cits
of th te Associattioni.
2 T HE AMER ICAN ECONOMIC R EVIEW
of income pe r capita, w e sh ould me asure sh are s of some fixe d ordinal
groups-pe rce ntile s, de cile s, quintile s, e tc. In th e unde rlying array th e
units sh ould be classifie d by av e rage income le v e ls for a sufficie ntly long
span so th at th e y form income -status groups-say a ge ne ration or
about 25 ye ars. With in such a pe riod, e v e n w h e n classifie d by se cular
income
le v e ls,
units may sh ift from one ordinal group to anoth e r. It
w ould, th e re fore , be ne ce ssary and use ful to study se parate ly th e re la-
tiv e sh are of units th at, th rough out th e ge ne ration pe riod of re fe re nce ,
w e re continuously w ith in a spe cific ordinal group, and th e sh are of th e
units th at mov e d into th at spe cific group; and th is sh ould be done for
th e sh are s of "re side nts" and "migrants" w ith in all ordinal groups.
With out such a long pe riod of re fe re nce and th e re sulting se paration
be tw e e n "re side nt" and "migrant" units at diffe re nt re lativ e income
le v e ls, th e v e ry distinction be tw e e n "low " and "h igh " income classe s
lose s its me aning, particularly in a study of long-te rm ch ange s in sh are s
and in ine qualitie s in th e distribution. T o say, for e xample , th at th e
"low e r" income classe s gaine d or lost during th e last tw e nty ye ars in
th at th e ir sh are of total income incre ase d or de cre ase d h as me aning only
if th e units h av e be e n classifie d as me mbe rs of th e "low e r" classe s
th rough out th ose 20 ye ars-and for th ose w h o h av e mov e d into or out
of th ose classe s re ce ntly such a state me nt h as no significance .
Furth e rmore , if one may add a final touch to w h at is be ginning to
look like a statistical e conomist's pipe dre am, w e sh ould be able to trace
se cular income le v e ls not only th rough a single ge ne ration but at le ast
th rough tw o-conne cting th e income s of a giv e n ge ne ration w ith th ose
of its imme diate de sce ndants. We could th e n distinguish units th at,
th rough out a giv e n ge ne ration, re main w ith in one ordinal group and
w h ose ch ildre n-th rough th e ir ge ne ration-are also w ith in th at group,
from units th at re main w ith in a group th rough th e ir ge ne ration but
w h ose ch ildre n mov e up or dow n on th e re lativ e e conomic scale in th e ir
time . T h e numbe r of possible combinations and pe rmutations be come s
large ; but it sh ould not obscure th e main de sign of th e income structure
calle d for-th e classification by long-te rm income status of a giv e n
ge ne ration and of its imme diate de sce ndants. If liv ing me mbe rs of
socie ty-as produce rs, consume rs, sav e rs, de cision-make rs on se cular
proble ms-re act to long-te rm ch ange s in income le v e ls and sh are s, data
on such an income structure are e sse ntial. An e conomic socie ty can th e n
be judge d by th e se cular le v e l of th e income sh are th at it prov ide s for
a giv e n ge ne ration and for its ch ildre n. T h e important corollary is th at
th e study of long-te rm ch ange s in th e income distribution must distin-
guish be tw e e n ch ange s in th e sh are s of re side nt groups-re side nt w ith in
e ith e r one or tw o ge ne rations-and ch ange s in th e income sh are s of
KUZNET S: ECONOMIC GR OWT H AND INCOME INEQUALIT Y 3
groups
th at,
judge d by th e ir se cular le v e ls, migrate upw ard or dow n-
w ard on th e income scale .
Ev e n if w e h ad data to approximate th e income structure just out-
line d, th e broad que stion pose d at th e start-h ow income ine quality
ch ange s in th e proce ss of a country's e conomic grow th -could be
answ e re d only for grow th unde r de fine d e conomic and social conditions.
And, in fact, w e sh all de al w ith th is que stion in te rms of th e e xpe rie nce
of th e now de v e lope d countrie s w h ich gre w unde r th e ae gis of th e busi-
ne ss e nte rprise . But e v e n w ith th is limitation, th e re are no statistics
th at can be use d dire ctly for th e purpose of me asuring th e se cular
income structure . Inde e d, I h av e difficulty in v isualizing h ow such
information could practicably be colle cte d-a difficulty th at may be
due to lack of familiarity w ith th e studie s of our colle ague s in de -
mograph y and sociology w h o h av e conce rne d th e mse lv e s w ith prob-
le ms of ge ne ration or inte rge ne ration mobility and status. But alth ough
w e now lack data dire ctly re le v ant to th e se cular income structure ,
th e se tting up of re asonably cle ar and ye t difficult spe cifications is
not me re ly an e xe rcise in pe rfe ctionism. For if th e se spe cifications do
approximate , and I trust th at th e y do, th e re al core of our inte re st w h e n
w e talk about sh are s of e conomic classe s or long-te rm ch ange s in th e se
sh are s, th e n prope r disclosure of our me aning and inte ntions is v itally
use ful. It force s us to e xamine and e v aluate critically th e data th at are
av ailable ; it pre v e nts us from jumping to conclusions base d on th e se
inade quate data; it re duce s th e loss and w aste of time inv olv e d in
me ch anical manipulations of th e type re pre se nte d by Pare to-curv e -
fitting to groups of data w h ose me aning, in te rms of income conce pt,
unit of obse rv ation, and proportion of th e total univ e rse cov e re d, re -
mains distre ssingly v ague ; and most important of all, it prope ls us
tow ard a de libe rate construction of te stable bridge s be tw e e n th e av ail-
able data and th e income structure th at is th e re al focus of our inte re st.
I. T re nds in Income Ine quality
Fore w arne d of th e difficultie s, w e turn now to th e av ailable data.
T h e se data, e v e n w h e n re lating to comple te populations, inv ariably
classify units by income for a giv e n ye ar. From our standpoint, th is is
th e ir major limitation. Be cause th e data ofte n do not pe rmit many
size -groupings, and be cause th e diffe re nce be tw e e n annual income
incide nce and longe r-te rm income status h as le ss e ffe ct if th e numbe r of
classe s is small and th e limits of e ach class are w ide , w e use a fe w w ide
classe s. T h is doe s not re solv e th e difficulty; and th e re are oth e rs due to
th e scantine ss of data for long pe riods, inade quacy of th e unit use d-
w h ich is, at be st, a family and v e ry ofte n a re porting unit-e rrors in th e
data, and so on th rough a long list. Conse que ntly, th e tre nds in th e
income structure can be disce rne d but dimly, and th e re sults conside re d
as pre liminary informe d gue sse s.
T h e data are for th e Unite d State s, England, and Ge rmany-a scant
sample , but at le ast a starting point for some infe re nce s conce rning
long-te rm ch ange s in th e pre se ntly de v e lope d countrie s. T h e ge ne ral
conclusion sugge ste d is th at th e re lativ e distribution of income , as
me asure d by annual income incide nce in rath e r broad classe s, h as be e n
mov ing tow ard e quality-w ith th e se tre nds particularly notice able
since th e 1920's but be ginning pe rh aps in th e pe riod be fore th e first
w orld w ar.
Le t me cite some figure s, all for income be fore dire ct taxe s, in sup-
port of th is impre ssion. In th e Unite d State s, in th e distribution of in-
come among familie s (e xcluding single indiv iduals), th e sh are s of th e
tw o low e st quintile s rise from 13? pe r ce nt in 1929 to 18 pe r ce nt in th e
ye ars afte r th e se cond w orld w ar (av e rage of 1944, 1946, 1947, and
1950); w h e re as th e sh are of th e top quintile de cline s from 55 to 44 pe r
ce nt, and th at of th e top 5 pe r ce nt from 31 to 20 pe r ce nt. In th e
Unite d Kingdom, th e sh are of th e top 5 pe r ce nt of units de cline s from
46 pe r ce nt in 1880 to 43 pe r ce nt in 1910 or 1913, to 33 pe r ce nt in
1929, to 31 pe r ce nt in 1938, and to 24 pe r ce nt in 1947; th e sh are of
th e low e r 85 pe r ce nt re mains fairly constant be tw e e n 1880 and 1913,
be tw e e n 41 and 43 pe r ce nt, but th e n rise s to 46 pe r ce nt in 1929 and
55 pe r ce nt in 1947. In Prussia income ine quality incre ase s sligh tly
be tw e e n 1875 and 1913-th e sh are s of th e top quintile rising from 48
to 50 pe r ce nt, of th e top 5 pe r ce nt from 26 to 30 pe r ce nt; th e sh are
of th e low e r 60 pe r ce nt, h ow e v e r, re mains about th e same . In Saxony,
th e ch ange be tw e e n 1880 and 1913 is minor: th e sh are of th e tw o
low e st quintile s de cline s from 15 to
14Y2
pe r ce nt; th at of th e th ird
quintile rise s from 12 to 13 pe r ce nt, of-th e fourth quintile from 16?2
to about 18 pe r ce nt; th at of th e top quintile de cline s from 56>2 to
54j/2 pe r ce nt, and of th e top 5 pe r ce nt from 34 to 33 pe r ce nt. In
Ge rmany as a w h ole , re lativ e income ine quality drops fairly sh arply
from 1913 to th e 1920's, appare ntly due to de cimation of large for-
tune s and prope rty income s during th e w ar and inflation; but th e n
be gins to re turn to pre w ar le v e ls during th e de pre ssion of th e 1930's.'
1
T h e follow ing source s w e re use d in calculating th e figure s cite d:
Unite d State s. For re ce nt ye ars w e use d Income Distribution by Size , 1944-1950 (Wash -
ington, 1953) and Se lma Goldsmith and oth e rs, "Size Distribution of Income Since th e
Mid-T h irtie s," R e v . Econ. Stat., Fe b. 1954, XXXVI, 1-32; for 1929, th e Brookings Institu-
tion data as adjuste d in Simon Kuzne ts, Sh are s of Uppe r Groups in Income and Sav ings
(Ne w York, 1953), p. 220.
Unite d Kingdom. For 1938 and 1947, Dudle y Se e rs, T h e Le v e lling of Income Since 1938
Ev e n for w h at th e y are assume d to re pre se nt, le t alone as approxima-
tions to sh are s in distributions by se cular income le v e ls, th e data are
such th at diffe re nce s of tw o or th re e pe rce ntage points cannot be as-
signe d significance . One must judge by th e ge ne ral w e igh t and conse n-
sus of th e e v ide nce -w h ich unfortunate ly is limite d to a fe w countrie s.
It justifie s a te ntativ e impre ssion of constancy in th e re lativ e distribu-
tion of income be fore taxe s, follow e d by some narrow ing of re lativ e
income ine quality afte r th e first w orld w ar-or e arlie r.
T h re e aspe cts of th is finding sh ould be stre sse d. First, th e data are
for income be fore dire ct taxe s and e xclude contributions by gov e rn-
me nt (e .g., re lie f and fre e assistance ). It is fair to argue th at both th e
proportion and progre ssiv ity of dire ct taxe s and th e proportion of total
income of indiv iduals accounte d for by gov e rnme nt assistance to th e
le ss priv ile ge d e conomic groups h av e grow n during re ce nt de cade s. T h is
is ce rtainly true of th e Unite d State s and th e Unite d Kingdom, but in
th e case of Ge rmany is subje ct to furth e r e xamination. It follow s th at
th e distribution of income afte r dire ct taxe s and including fre e contribu-
tions by gov e rnme nt w ould sh ow an e v e n gre ate r narrow ing of in-
e quality in de v e lope d countrie s w ith size distributions of pre tax, e x-
gov e rnme nt-be ne fits income similar to th ose for th e Unite d State s and
th e Unite d Kingdom.
Se cond, such stability or re duction in th e ine quality of th e pe rce ntage
sh are s w as accompanie d by significant rise s in re al income pe r capita.
T h e countrie s now classifie d as de v e lope d h av e e njoye d rising pe r
capita income s e xce pt during catastroph ic pe riods such as ye ars of
activ e w orld conflict. He nce , if th e sh are s of groups classifie d by th e ir
annual income position can be v ie w e d as approximations to sh are s of
groups classifie d by th e ir se cular income le v e ls, a constant pe rce ntage
sh are of a giv e n group me ans th at its pe r capita re al income is rising
at th e same rate as th e av e rage for all units in th e country; and a re -
duction in ine quality of th e sh are s me ans th at th e pe r capita income
of th e low e r-income groups is rising at a more rapid rate th an th e pe r
capita income of th e uppe r-income groups.
T h e th ird point can be put in th e form of a que stion. Do th e distribu-
(Oxford, 1951) p. 39; for 1929, Colin Clark, National Income and Outlay (London, 1937)
T able 47, p. 109; for 1880, 1910, and 1913, A. Bow le y, T h e Ch ange in th e Distribution of
th e National Income , 1880-1913 (Oxford, 1920).
Ge rmany. For th e constitue nt are as (Prussia, Saxony and oth e rs) for ye ars be fore th e
first w orld w ar, base d on S. Prokopov ich , National Income of We ste rn Europe an Countrie s
(publish e d in Moscow in th e 1920's). Some summary re sults are giv e n in Prokopov ich ,
"T h e Distribution of National Income ," Econ. Jour., March 1926, XXXVI, 69-82. Se e also,
"Das De utsch e Volkse inkomme n v or und nach de m Krie ge ," Einze lsch rift zur Stat. de s
De utsch e n R e icks, no. 24 (Be rlin, 1932), and W. S. and E. S. Woytinsky, World Popula-
tion and Production (Ne w York, 1953) T able 192, p. 709.
tions by annual income s prope rly re fle ct tre nds in distribution by
se cular income s? As te ch nology and e conomic pe rformance rise to
h igh e r le v e ls, income s are le ss subje ct to transie nt disturbance s, not
ne ce ssarily of th e cyclical orde r th at can be re cognize d and allow e d
for by re fe re nce to busine ss cycle ch ronology, but of a more irre gular
type . If in th e e arlie r ye ars th e e conomic fortune s of units w e re sub-
je ct to gre ate r v icissitude s-poor crops for some farme rs, natural
calamity losse s for some nonfarm busine ss units-if th e ov e r-all propor-
tion of indiv idual e ntre pre ne urs w h ose income s w e re subje ct to such
calamitie s,
more ye ste rday but some e v e n today, w as large r in e arlie r
de cade s, th e se e arlie r distributions of income w ould be more affe cte d
by transie nt disturbance s. In th e se e arlie r distributions th e te mporarily
unfortunate migh t crow d th e low e r quintile s and de pre ss th e ir sh are s
unduly, and th e te mporarily fortunate migh t dominate th e top quintile
and raise its sh are unduly-proportionate ly more th an in th e distribu-
tions for late r ye ars. If so, distributions by longe r-te rm av e rage in-
come s migh t sh ow le ss re duction in ine quality th an do th e distributions
by annual income s; th e y migh t e v e n sh ow an opposite tre nd.
One may doubt w h e th e r th is qualification w ould upse t a narrow ing
of ine quality as marke d as th at for th e Unite d State s, and in as sh ort
a pe riod as tw e nty-fiv e ye ars. Nor is it like ly to affe ct th e pe rsiste nt
dow nw ard drift in th e spre ad of th e distributions in th e Unite d King-
dom. But I must admit a strong e le me nt of judgme nt in de ciding h ow
far th is qualification modifie s th e finding of long-te rm stability follow e d
by re duction in income ine quality in th e fe w de v e lope d countrie s for
w h ich it is obse rv e d or is like ly to be re v e ale d by e xisting data. T h e
important point is th at th e qualification is re le v ant; it sugge sts ne e d for
furth e r study if w e are to le arn much from th e av ailable data con-
ce rning th e se cular income structure ; and such study is like ly to yie ld
re sults of inte re st in th e mse lv e s in th e ir be aring upon th e proble m
of tre nds in te mporal instability of income flow s to indiv idual units
or to e conomically significant groups of units in diffe re nt se ctors of
th e national e conomy.
II. An Atte mpt at Explanation
If th e abov e summary of tre nds in th e se cular income structure of
de v e lope d countrie s come s pe rilously close to pure gue ssw ork, an
atte mpt to e xplain th e se dimly disce rnible tre nds may sure ly se e m
foolh ardy. Ye t it is ne ce ssary to do so if only to bring to th e surface
some factors th at may h av e be e n at play; induce a se arch for data
be aring upon th e se factors; and th us confirm or re v ise our impre ssions
of th e tre nds th e mse lv e s. Such pre liminary spe culations are use ful
prov ide d it is re cognize d th at w e are at a
re lativ e ly e arly stage
in a
long proce ss of inte rplay among te ntativ e summarie s of
e v ide nce ,
pre liminary
h ypoth e se s,
and se arch for additional e v ide nce th at migh t
le ad to re formulation and re v isions-as base s for ne w
analysis and
furth e r se arch .
T h e pre se nt instalme nt of initial spe culation may be introduce d by
saying th at a long-te rm
constancy,
le t alone
re duction,
of ine quality in
th e se cular income structure is a puzzle . For th e re are at le ast tw o
groups of force s in th e long-te rm ope ration of de v e lope d countrie s th at
make for incre asing ine quality in th e distribution of income be fore
taxe s and e xcluding contributions by gov e rnme nts. T h e first group
re late s to th e conce ntration of sav ings in th e uppe r-income bracke ts.
According to all re ce nt studie s of th e apportionme nt of income be tw e e n
consumption and sav ings, only th e uppe r-income groups sav e ; th e
total sav ings of groups be low th e top de cile are fairly close to ze ro. For
e xample , th e top 5 pe r ce nt of units in th e Unite d State s appe ar to
account for almost tw o-th irds of indiv iduals'
sav ings; and th e top
de cile come s close to accounting for all of it. Wh at is
particularly im-
portant is th at th e ine quality in distribution of sav ings is gre ate r th an
th at in th e distribution of prope rty income s, and h e nce of asse ts.2
Grante d th at th is finding is base d on distribution of annual income ,
and th at a distribution by se cular le v e ls w ould sh ow le ss ine quality in
income and corre spondingly le ss conce ntration of sav ings, th e in-
e quality in sav ings w ould still re main fairly sh arp, pe rh aps more so
th an in h oldings of asse ts. Oth e r conditions be ing e qual, th e cumulativ e
e ffe ct of such ine quality in sav ings w ould be th e conce ntration of an
incre asing proportion of income -yie lding asse ts in th e h ands of th e
uppe r groups-a basis for large r income slh are s of th e se groups and
th e ir de sce ndants.
T h e se cond source of th e puzzle lie s in th e industrial structure of
th e income distribution. An inv ariable accompanime nt of grow th in
de v e lope d countrie s is th e sh ift aw ay from agriculture , a proce ss usu-
ally re fe rre d to as industrialization and urbanization. T h e income dis-
tribution of th e total population, in th e simple st mode l, may th e re fore
be v ie w e d as a combination of th e income distributions of th e rural
and of th e urban populations. Wh at little w e know of th e structure s
of th e se tw o compone nt income distributions re v e als th at: (a) th e
av e rage pe r capita income of th e rural population is usually low e r th an
th at of th e urban;' (b) ine quality in th e pe rce ntage sh are s w ith in th e
2
Se e Kuzne ts, op. cit., particularly Ch apte rs 2 and 6.
T h e low e r le v e l of pe r capita income of th e agricultural or rural population compare d
w ith th at of urban is fairly w e ll
e stablish e d, for th is country by state s, and for many
distribution for th e rural population is some w h at narrow e r th an in
th at for th e urban population-e v e n w h e n base d on annual income ; and
th is diffe re nce w ould probably be w ide r for distributions by se cular
income le v e ls.4 Ope rating w ith th is simple mode l, w h at conclusions do
w e re ach ? First, all oth e r conditions be ing e qual,
th e incre asing w e igh t
of urban population me ans an incre asing sh are for th e more une qual of
th e tw o compone nt distributions. Se cond, th e re lativ e diffe re nce in pe r
capita income be tw e e n th e rural and urban populations doe s not
ne ce ssarily drift dow nw ard in th e proce ss of e conomic grow th : inde e d,
th e re is some e v ide nce to sugge st th at it is stable at be st, and te nds to
w ide n be cause pe r capita productiv ity in urban pursuits incre ase s more
rapidly th an in agriculture . If th is is so, ine quality in th e total in-
come distribution sh ould incre ase .
T w o que stions th e n arise : First, w h y doe s th e sh are of th e top-
income groups sh ow no rise ov e r time if th e conce ntration of sav ings
h as a cumulativ e e ffe ct? Se cond, w h y doe s income ine quality de cline
and particularly w h y doe s th e sh are of th e low e r-income groups rise if
both th e w e igh t of th e more une qual urban income distribution and th e
re lativ e diffe re nce be tw e e n pe r capita urban and pe r capita rural in-
come s incre ase ?
T h e first que stion h as be e n discusse d e lse w h e re , alth ough th e re -
sults are still pre liminary h ypoth e se s,5 and it w ould be impossible to
do more h e re th an summarize th e m brie fly.
Factors Counte racting th e Conce ntration of Sav ing
One group of factors counte racting th e cumulativ e e ffe ct of con-
oth e r countrie s (se e , e .g., a summary table of close ly re late d me asure s of product and
w orke rs e ngage d, for v arious div isions of th e productiv e syste m, in Colin Clark, Conditions
of Economic Progre ss, 2nd e d. [London 19511, pp. 316-18). T h e same table sugge sts, for
th e countrie s w ith sufficie ntly long re cords, a stable or incre asing re lativ e diffe re nce be tw e e n
pe r-w orke r product in agriculture and pe r-w orke r product in oth e r se ctors of th e e conomy.
'T h is is true of th e U. S. distributions prior to th e se cond w orld w ar (se e source s cite d
in footnote 1); in th e ye ars afte r th e se cond w orld w ar th e diffe re nce se e ms to h av e disap-
pe are d. It is true of th e distributions for Prussia, cite d by Prokopov ich ; and most conspicu-
ous for India today as sh ow n in th e rough distributions by M. Mukh e rje e and A. K. Gh osh
in "T h e Patte rn of Income and Expe nditure s in th e Indian Union: A T e ntativ e Study,"
Inte rnational Statistical Confe re nce s, De ce mbe r 1951, Calcutta, India, Part III, pp. 49-68.
'Some e le me nts of th e discussion appe are d in "Proportion of Capital Formation to Na-
tional Product," a pape r submitte d to th e annual me e ting of th e Ame rican Economic Associ-
ation in 1951 and publish e d in Am. Econ. R e v ., Proce e dings, May 1952, XLII, 507-26. A
more e laborate state me nt is pre se nte d in "Inte rnational Diffe re nce s in Capital Formation
and Financing" (particularly Appe ndix C, Le v e ls and T re nds in Income Sh are s of Uppe r
Income Groups), a pape r submitte d to a Confe re nce on Capital Formation and Economic
Grow th h e ld in 1953 unde r th e auspice s of th e Univ e rsitie s-National Bure au Committe e
for Economic R e se arch . It is now in pre ss as part of th e v olume of proce e dings of th at
confe re nce .
ce ntration of sav ings upon uppe r-income sh are s is le gislativ e inte rfe r-
e nce and "political" de cisions. T h e se may be aime d at
limiting th e
cumulation of prope rty dire ctly th rough inh e ritance taxe s and
oth e r
e xplicit capital le v ie s. T h e y may produce similar e ffe cts
indire ctly,
e .g., by gov e rnme nt-pe rmitte d or -induce d inflation w h ich re duce s
th e
e conomic v alue of accumulate d w e alth store d in fixe d-price se curitie s
or oth e r prope rtie s not fully re sponsiv e to price ch ange s; or by le gal
re striction of th e yie ld on accumulate d prope rty, as h appe ne d re ce ntly
in th e form of re nt controls or of artificially low long-te rm inte re st rate s
maintaine d by th e gov e rnme nt to prote ct th e marke t for its ow n bonds.
T o discuss th is comple x of proce sse s is be yond th e compe te nce of
th is pape r, but its e xiste nce and possible w ide e ffe ct sh ould be note d
and one point e mph asize d. All th e se inte rv e ntions, e v e n w h e n not
dire ctly aime d at limiting th e e ffe cts of accumulation of past sav ings
in th e h ands of th e fe w , do re fle ct th e v ie w of socie ty on th e long-te rm
utility of w ide income ine qualitie s. T h is v ie w is a v ital force th at w ould
ope rate in de mocratic socie tie s e v e n if th e re w e re no oth e r counte ract-
ing factors. T h is sh ould be borne in mind in conne ction w ith ch ange s in
th is v ie w e v e n in de v e lope d countrie s, w h ich re sult from th e proce ss of
grow th and constitute a re -e v aluation of th e ne e d for income in-
e qualitie s as a source of sav ings for e conomic grow th . T h e re sult of
such ch ange s w ould be an incre asing pre ssure of le gal and political
de cisions on uppe r-income sh are s-incre asing as a country mov e s to
h igh e r e conomic le v e ls.
We turn to th re e oth e r, le ss obv ious groups of factors counte rv ailing
th e cumulativ e e ffe cts of conce ntration of sav ings. T h e first is de mo-
graph ic. In th e pre se ntly de v e lope d countrie s th e re h av e be e n dif-
fe re ntial rate s of incre ase be tw e e n th e rich and th e poor-family con-
trol h av ing first spre ad to th e forme r. He nce , e v e n disre garding mi-
gration, one can argue th at th e top 5 pe r ce nt of 1870 and its de sce nd-
ants w ould account for a significantly smalle r pe rce ntage of th e popu-
lation in 1920. T h is is e v e n more like ly in a country like th e Unite d
State s w ith its substantial immigration-usually e nte ring th e income
distribution at th e low e r-income le v e ls; and may be le ss like ly in a
country from w h ich th e poor h av e e migrate d. T h e top 5 pe r ce nt of
population in 1920 is, th e re fore , comprise d only partly of th e de -
sce ndants of th e top 5. pe r ce nt of 1870; pe rh aps h alf or a large r
fraction must h av e originate d in th e low e r-income bracke ts of 1870.
T h is me ans th at th e pe riod during w h ich e ffe cts of conce ntration of
sav ings can be assume d to h av e cumulate d to raise th e income sh are
of any giv e n fixe d ordinal group (w h e th e r it be th e top 1, 5, or 10 pe r
ce nt of th e population) is much sh orte r th an th e fifty ye ars in th e
span; and h e nce th e se e ffe cts are much w e ake r th an th e y w ould h av e
be e n if th e top 5 pe r ce nt of 1870 h ad, th rough th e ir
de sce ndants, fille d
comple te ly th e ranks of th e top 5 pe r ce nt of th e
population of 1920.
Alth ough th e cumulativ e e ffe ct of sav ings may be to raise th e
re lativ e
income of a progre ssiv e ly diminish ing top proportion of total
popula-
tion, th e ir e ffe ct on th e re lativ e sh are of a
fixe d top proportion
of th e
population is much re duce d.
T h e se cond group of force s re side s in th e v e ry nature of a
dynamic
e conomy w ith re lativ e fre e dom of indiv idual opportunity.
In such
a
socie ty te ch nological ch ange is rampant and
prope rty asse ts
th at
originate d in olde r industrie s almost ine v itably h av e a diminish ing
proportional w e igh t in th e total be cause of th e more
rapid grow th of
younge r industrie s. Unle ss th e de sce ndants of a h igh -income group
manage to sh ift th e ir accumulating asse ts into ne w fie lds and partici-
pate w ith ne w
e ntre pre ne urs
in th e grow ing sh are of th e ne w and more
profitable industrie s, th e long-range re turns on th e ir prope rty h oldings
are like ly to be significantly low e r th an th ose of th e more re ce nt
e ntrants into th e class of substantial asse t h olde rs. "From sh irt-sle e v e s
to sh irt-sle e v e s in th re e ge ne rations" probably e xagge rate s th e e ffe cts
of th is dynamism of a grow ing e conomy: th e re are , among th e uppe r-
income groups of today, many de sce ndants of th e uppe r-income groups
of more th an th re e or e v e n four ge ne rations ago. But th e adage is
re alistic in th e se nse th at a long unbroke n se que nce of conne ction w ith
rising industrie s and h e nce w ith major source s of continue d large
prope rty income s is e xce e dingly rare ; th at th e succe ssful gre at e ntre -
pre ne urs of today are rare ly sons of th e gre at and succe ssful e ntre pre -
ne urs of ye ste rday.
T h e th ird group of factors is sugge ste d by th e
importance , e v e n in
th e uppe r-income bracke ts, of se rv ice income . At any giv e n time , only
a limite d part of th e income diffe re ntial of a top group is accounte d for
by th e conce ntration of prope rty yie lds: much of it come s from th e
h igh le v e l of se rv ice income (profe ssional and e ntre pre ne urial e arnings
and th e like ). T h e se cular rise in th e uppe r income s due to th is source is
like ly to be le ss marke d th an in th e se rv ice income s of low e r
bracke ts,
and for tw o some w h at diffe re nt re asons. First, in so far as h igh le v e ls
of se rv ice income s of giv e n uppe r units are due to indiv idual e xce lle nce
(as is true of many profe ssional and e ntre pre ne urial pursuits), th e re
is much le ss ince ntiv e for and possibility of ke e ping such income s at
continue d h igh re lativ e le v e ls. He nce , th e se rv ice income s of th e de -
sce ndants of an initially h igh le v e l unit are not like ly to sh ow as strong
an upw ard tre nd as th e income s for th e large body of population at
low e r-income le v e ls. Se cond, a substantial part of th e rising tre nd in
pe r capita income is due to inte rindustry sh ift, i.e ., a sh ift of w orke rs
from low e r-income to h igh e r-income industrie s. T h e possibilitie s of rise
due to such
inte rindustry sh ifts in th e se rv ice income s of th e
initially
h igh -income groups are much more limite d th an for th e population as a
w h ole : th e y are alre ady in h igh -income occupations and industrie s
and
th e range for th e m tow ard h igh e r paid occupations is more
narrow ly
circumscribe d.
T h e se th re e groups of factors, e v e n disre garding such le gislativ e and
political inte rv e ntion as is indicate d abov e , are all ch aracte ristics of a
dynamic grow ing e conomy. T h e diffe re ntials in rate of natural incre ase
be tw e e n th e uppe r- and th e low e r-income groups are true only of a
rapidly grow ing population-w ith or w ith out immigration-but ac-
companie d by de clining de ath rate s and de clining birth rate s, a de mo-
graph ic patte rn associate d in th e past only w ith th e grow ing We ste rn
e conomie s. T h e impact of ne w industrie s on obsole sce nce of alre ady
e stablish e d w e alth as a source of prope rty income is cle arly a function
of rapid grow th , and th e more rapid th e grow th th e gre ate r th e impact
w ill be . T h e e ffe ct of inte rindustry sh ifts on th e rise of pe r capita
income , particularly of low e r-income groups, is also a function of
grow th since only in a grow ing e conomy is th e re much sh ift in th e
re lativ e importance of th e se v e ral industrial se ctors. One can th e n say,
in ge ne ral, th at th e basic factor militating against th e rise in uppe r-
income sh are s th at w ould be produce d by th e cumulativ e e ffe cts of
conce ntration of sav ings, is th e dynamism of a grow ing and fre e
e conomic socie ty.
Ye t w h ile th e discussion answ e rs th e original que stion, it yie lds
no de te rminate answ e r as to w h e th e r th e tre nd in income sh are s of
uppe r groups is upw ard, dow nw ard, or constant. Ev e n for th e spe cific
que stion discusse d, a de te rminate answ e r de pe nds upon th e re lativ e
balance of factors-continuous conce ntration of sav ings making for
an incre asing sh are , and th e offse tting force s te nding to cance l th is
e ffe ct. T o te ll w h at th e tre nd of uppe r-income sh are s is like ly to be , w e
ne e d to know much more about th e w e igh ts of th e se conflicting pre s-
sure s. More ov e r, th e discussion h as brough t to th e surface factors th at,
in and of th e mse lv e s, may cause e ith e r an upw ard or a dow nw ard tre nd
in th e sh are of uppe r-income groups and h e nce in income ine quality-
in distributions of annual or of se cular income . For e xample , th e ne w
e ntrants into th e uppe r groups-th e upw ard "migrants"-w h o rise
e ith e r be cause of e xce ptional ability or attach me nt to ne w industrie s or
for a v arie ty of oth e r
re asons-may be e nte ring th e fixe d uppe r group
of say th e top 5 pe r ce nt w ith an income diffe re ntial-e ith e r annual or
long-te rm-th at may be re lativ e ly gre ate r th an th at of e ntrants in th e
pre ce ding ge ne ration. Noth ing in th e argume nt so far e xclude s th is
possibility-w h ich w ould me an a rise in th e sh are of uppe r-income
groups, e v e n if th e sh are of th e old "re side nt" part re mains constant or
e v e n de cline s. Ev e n disre garding oth e r factors th at w ill be note d in th e
ne xt se ction, no firm conclusion as to tre nds of uppe r-income sh are s
can be de riv e d from th e bare mode l discusse d. Se arch for furth e r data
migh t yie ld e v ide nce th at w ould pe rmit a re asonably rough but de te r-
minate conclusion; but I h av e no such e v ide nce at h and.
T h e Sh ift from Agricultural to Nonagricultural Se ctors
Wh at about th e tre nd tow ard gre ate r ine quality due to th e sh ift
from th e agricultural to th e nonagricultural se ctors? In v ie w of th e im-
portance of industrialization and urbanization in th e proce ss of e co-
nomic grow th , th e ir implications for tre nds in th e income distribution
sh ould be e xplore d-e v e n th ough w e h av e ne ith e r th e ne ce ssary data
nor a re asonably comple te th e ore tical mode l.
T h e implications can be brough t out most cle arly w ith th e h e lp of a
nume rical illustration (se e T able I). In th is illustration w e de al w ith
tw o se ctors: agriculture (A) and all oth e rs (B). For e ach se ctor w e
assume pe rce ntage distributions of total se ctor income among se ctor
de cile s: one distribution (E) is of mode rate ine quality, w ith th e sh are s
starting at 5.5 pe r ce nt for th e low e st de cile and rising 1 pe rce ntage
point from de cile to de cile to re ach 14.5 pe r ce nt for th e top de cile ; th e
oth e r distribution (U) is much more une qual, th e sh are s starting at 1
pe r ce nt for th e low e st de cile , and rising 2 pe rce ntage points from de cile
to de cile to re ach 19 pe r ce nt for th e top de cile . We assign pe r capita
income s to e ach se ctor: 50 units to A and 100 units to B in case I (line s
1-10 in th e illustration); 50 to A and 200 to B in case II (line s 11-20).
Finally, w e allow th e proportion of th e numbe rs in se ctor A in th e total
numbe r to de cline from 0.8 to 0.2.
T h e nume rical illustration is only a partial summary of th e calcula-
tions, sh ow ing th e sh are s of th e low e st and h igh e st quintile s in th e in-
come distribution for th e total population unde r diffe re nt assumptions.6
T h e basic assumptions use d th rough out are th at th e pe r capita income
of se ctor B (nonagricultural) is alw ays h igh e r th an th at of se ctor A;
th at th e proportion of se ctor A in th e total numbe r de cline s; and th at
th e ine quality of th e income distribution w ith in se ctor A may be as
w ide as th at w ith in se ctor B but not w ide r. With th e assumptions con-
'T h e unde rlying calculations are quite simple . For e ach case w e distinguish 20 ce lls w ith in
th e total distribution-se ts of te n de cile s for e ach se ctor. For e ach ce ll w e compute th e
pe rce ntage sh are s of both numbe r and income in th e numbe r and income of total popula-
tion, and h e nce also th e re lativ e pe r capita income of e ach ce ll. T h e ce lls are th e n arraye d
in incre asing orde r of th e ir re lativ e pe r capita income and cumulate d. In th e re sulting
cumulativ e distributions of numbe r and countryw ide income w e e stablish , by arith me tic
inte rpolation, if inte rpolation is ne e de d, th e pe rce ntage sh are s in total income of th e
succe ssiv e quintile s of th e country's population.
T ABLE I.-PER CENT AGE SHAR ES OF 1ST AND 5T H QUINT ILES IN T HE INCOME DIST R iBUT ION
FOR T OT AL POPULAT ION UNDER VAR YING ASSUMPT IONS CONCER NING PER CAPIT A
INCOME WIT HIN T HE SECT OR S, PR OPOR T IONS OF SECT OR S IN T OT AL NUMBER ,
AND INT R ASECT OR INCOME DIST R IBUT IONS
Proportion of Numbe r in Se ctor A
to T otal Numbe r
0.8 0.7 0.6 0.5 0.4 0.3 0.2
(1) (2) (3) (4) (5) (6) (7)
I. Pe r Capita Income of Se ctor A= 50;
of Se ctor B =
100
1. Pe r capita income of total pop-
ulation 60 65 70 75 80 85 90
Distribution (E) for Both Se c-
tors
2. Sh are of lst quintile 10.5 9.9 9.6 9.3 9.4 9.8 10.2
3. Sh are of 5th quintile 34.2 35.8 35.7 34.7 33.2 31.9 30.4
4. R ange (3-2) 23.7 25.9 26.1 25.3 23.9 22.1 20.2
Distribution (U) for Both Se c-
tors
5. Sh are of 1st quintile 3.8 3.8 3.7 3.7 3.8 3.8 3.9
7. R ange (6-5) 36.8 38.1 39.1 39.0 37.8 36.4 34.8
Distribution (E) for Se ctor A,
(U) for Se ctor B
10. R ange (9-8) 28.3 32.7 35.4 36.0 35.5 34.8 33.8
II. Pe r Capita Income of Se ctor A= 50;
of Se ctor B = 200
11. Pe r capita income of total pop-
ulation 80 95 110 125 140 155 170
Distribution (E) for Both Se c-
tors
14. R ange (13-12) 42.1 42.3 39.4 36.0 32.6 29.6 26.3
Distribution (U) for Both Se c-
tors
15. Sh are of lst quintile 3.1 2.9 2.7 2.6 2.6 2.7 3.1
17. R ange (16-15) 49.6 53.1 51.8 48.6 44.8 41.4 37.9
Distribution (E) for Se ctor A,
(U) for Se ctor B
20. R ange (19-18) 44.2 49.8 49.2 46.5 43.2 40.2 37.2
For me th ods of calculating th e sh are s of quintile s, se e te xt
(p.
12 and fn.
6).
Some diffe re nce s
w ill not ch e ck be cause of
rounding.
ce rning th re e se ts of factors-inte rse ctor diffe re nce s in
pe r capita
in-
come , intrase ctor
distributions, and se ctor
w e igh ts-v arying
w ith in th e
limitations just indicate d, th e follow ing conclusions are
sugge ste d:
First, if th e pe r capita income diffe re ntial incre ase s, or if th e income
distribution is more une qual for se ctor B th an for se ctor A, or if both
conditions are pre se nt, th e rise ov e r time in th e re lativ e w e igh t of se ctor
B cause s a marke d incre ase in ine quality in th e countryw ide income
distribution. We h av e h e re a de monstration of th e e ffe cts upon tre nds
in income ine quality of inte rindustry sh ifts aw ay from agriculture dis-
cusse d abov e (pp. 7-8).
Se cond, if th e intrase ctor income distribution is th e same for both
se ctors, and th e w ide ning ine quality in th e countryw ide income distribu-
tion is due only to th e incre asing pe r capita income diffe re ntial in fav or
of se ctor B, such w ide ning is gre ate r w h e n th e intrase ctor income dis-
tributions are ch aracte rize d by mode rate rath e r th an w ide ine quality.
T h us,
if th e intrase ctor distributions are of th e E type , th e range in th e
countryw ide distribution w ide ns from 23.7 to 26.3 as proportion of A
drops from 0.8 to 0.2 and as th e ratio of pe r capita income of se ctor B
to th at of se ctor A ch ange s from 2 to 4 (se e line
4, col. 1, and line 14,
col. 7). If th e U distributions are use d, th e range , unde r ide ntical con-
ditions,
w ide ns only from 36.8 to 37.9 (se e line 7, col. 1, and line 17,
col. 7). T h is diffe re nce is re v e ale d more cle arly by th e ch ange in th e
sh are of th e 1st quintile , w h ich be ars th e brunt of w ide ning ine quality:
for th e E distribution, th e sh are drops from 10.5 (line 2, col. 1) to 5.9
(line 12, col. 7); for th e U distribution, from 3.8 (line 5, col. 1) to 3.1
(line 15, col. 7).
T h ird, if th e pe r capita income diffe re ntial be tw e e n se ctors is con-
stant, but th e intrase ctor distribution of B is more une qual th an th at of
A, th e w ide ning ine quality in th e countryw ide distribution is th e
gre ate r, th e low e r th e assume d pe r capita income diffe re ntial. T h us for
a diffe re ntial of 2 to 1, th e range w ide ns from 28.3 w h e n th e proportion
of A is 0.8 (line 10, col. 1) to 36.0 at th e pe ak w h e n th e proportion of
A is 0.5 (line 10, col. 4) and is still 33.8 w h e n th e proportion of A drops
to 0.2 (line 10, col. 7). For a pe r capita income diffe re ntial of 4 to 1, th e
w ide ning of th e range at th e maximum is only from 44.2 (line 20, col.
1) to 49.8 (line 20, col. 2) and th e n th e range de cline s to 37.2 (line 20,
col. 7), w e ll be low th e initial le v e l.
Fourth , th e assumptions utilize d in th e nume rical illustration-of a
rise in proportions of total numbe r in se ction B, of gre ate r ine quality
in th e distribution w ith in se ctor B, and of th e grow ing e xce ss of pe r
capita income in B ov e r th at in A-yie ld a de cline in th e sh are of th e 1st
quintile th at is much more conspicuous th an th e rise in th e sh are of th e
5th quintile . T h us th e sh are of th e 1st quintile , w ith th e proportion of A
at 0.8, distribution in B more une qual th an in A, and a pe r capita in-
come diffe re ntial of 2 to 1,
is 9.3 (line 8, col. 1). As w e sh ift to a pro-
portion of A of 0.2, and a pe r capita income diffe re ntial of 4 to 1, th e
sh are of th e 1st quintile drops to 3.8 (line 18, col. 7). Unde r th e same
conditions, th e sh are of th e 5th quintile ch ange s from 37.7 (line 9, col.
1) to 40.9 (line 19, col. 7).
Fifth , e v e n if th e diffe re ntial in pe r capita income be tw e e n th e tw o
se ctors re mains constant and th e intrase ctor distributions are ide ntical
for th e tw o se ctors, th e me re sh ift in th e
proportions
of numbe rs pro-
duce s sligh t but significant ch ange s in th e distribution for th e country
as a w h ole . In ge ne ral, as th e proportion of A drifts from 0.8 dow n-
w ards, th e range te nds first to w ide n and th e n to diminish . Wh e n th e pe r
capita income diffe re ntial is low (2 to 1), th e w ide ning of th e range
re ach e s a pe ak close to middle of th e se rie s, i.e ., at a proportion of A
e qual to 0.6 (line s 4 and 7); and th e mov e me nts in th e range te nd to be
rath e r limite d. WVh e n th e pe r capita income diffe re ntial is large (4 to 1),
th e range contracts as soon as th e proportion of A passe s th e le v e l of
0.7, and th e de cline in th e range is quite substantial (line s 14 and 17).
Sixth , of particular be aring upon th e sh are s of uppe r-income groups
is th e finding th at th e sh are of th e top quintile de cline s as th e propor-
tion of A falls be low a ce rtain, rath e r h igh fraction of total numbe rs.
T h e re is not a single case in th e illustration in w h ich th e sh are of th e
5th quintile fails to
de cline , e ith e r th rough out or th rough a substantial
se gme nt of th e se que nce in th e dow nw ard mov e me nt of th e proportion
of A from 0.8 to 0.2. In line s 6 and 9, th e sh are of th e 5th quintile de -
cline s be yond th e point at w h ich th e proportion of A is 0.6; and in all
oth e r re le v ant line s th e dow nw ard tre nd in th e sh are of th e 5th quintile
se ts in e arlie r. T h e re ason lie s, of course , in th e fact th at w ith incre asing
industrialization, th e grow ing w e igh t of th e nonagricultural se ctor,
w ith its h igh e r pe r capita income , raise s th e pe r capita income for th e
w h ole e conomy; and ye t pe r capita income w ith in e ach se ctor and th e
intrase ctor distributions are ke pt constant. Unde r such conditions, th e
uppe r sh are s w ould fail to de cline only if th e re w e re e ith e r a gre ate r
rise in pe r capita income of se ctor B th an in th at of se ctor A; or incre as-
ing ine quality in th e intrase ctor distribution of se ctor B.
Se v e ral oth e r conje ctural conclusions could be draw n w ith additional
v ariations in assumptions, and multiplication of se ctors be yond th e
tw o distinguish e d in th e nume rical illustration. But e v e n in th e simple
mode l illustrate d th e v arie ty of possible patte rns is impre ssiv e ; and
one is force d to th e v ie w th at much more e mpirical information is
ne e de d to pe rmit a prope r ch oice of spe cific assumptions and constants.
Grante d th at se v e ral of th e conclusions could be ge ne ralize d in formal
math e matical te rms, use ful infe re nce s w ould be w ith in our re ach only if
w e kne w more about th e spe cific se ctor distributions and th e le v e ls and
tre nds in pe r capita income diffe re ntials among th e se ctors.
If th e n w e limit ourse lv e s to w h at is know n or can be plausibly as-
sume d, th e follow ing infe re nce s can be sugge ste d. We know th at
pe r
capita income is gre ate r in se ctor B th an in se ctor A; th at, at be st, th e
pe r capita income diffe re ntial be tw e e n se ctors A and B h as be e n fairly
constant (e .g., in th e Unite d State s) and h as pe rh aps more ofte n in-
cre ase d; th at th e proportion of se ctor A in total numbe rs h as dimin-
ish e d. T h e n, if w e start w ith intrase ctor distribution of B more une qual
th an for A, w e w ould e xpe ct re sults sugge ste d by e ith e r line s 8-10 or
18-20. In th e forme r case , th e range w ide ns as th e proportion of A drops
from 0.8 to 0.5, and th e n narrow s. In th e latte r
case ,
th e
range de cline s
be yond th e point at w h ich th e proportion of A is 0.7. But in both case s,
th e sh are of th e 1st quintile
de cline s,
and fairly appre ciably and con-
tinuously (se e line s 8 and 18). T h e magnitude and continuity of th e
de cline are partly th e re sult of th e spe cific assumptions made ; but one
w ould be justifie d in arguing th at w ith in th e broad limits sugge ste d by
th e illustration, th e assumption of gre ate r ine quality in th e intrase ctor
distribution for se ctor B th an for se ctor A, yie lds a dow nw ard tre nd
in th e sh are of th e low e r-income
groups. Ye t w e find no such tre nd in
th e e mpirical e v ide nce th at w e h av e . Can w e assume th at in th e e arlie r
pe riods th e inte rnal distribution for se ctor B w as not more une qual th an
for se ctor A, de spite th e more re ce nt indications th at urban income dis-
tribution is more une qual th an th e rural?
T h e re is, obv iously, room for conje cture . It se e ms most plausible
to assume th at in e arlie r pe riods of industrialization, e v e n w h e n th e
nonagricultural population w as still re lativ e ly small in th e total, its in-
come distribution w as more une qual th an th at of th e agricultural popu-
lation. T h is w ould be particularly so during th e pe riods w h e n industri-
alization and urbanization w e re proce e ding apace and th e urban popula-
tion w as be ing sw e lle d, and fairly rapidly, by immigrants-e ith e r from
th e country's agricultural are as or from abroad. Unde r th e se condi-
tions, th e urban population w ould run th e full gamut from low -income
positions of re ce nt e ntrants to th e e conomic pe aks of th e e stablish e d
top-income groups. T h e urban income ine qualitie s migh t be assume d to
be far w ide r th an th ose for th e agricultural population w h ich w as or-
ganize d in re lativ e ly small indiv idual e nte rprise s (large -scale units w e re
rare r th e n th an now ).
If w e grant th e assumption of w ide r ine quality of distribution in se c-
tor B, th e sh are s of th e low e r-income bracke ts sh ould h av e sh ow n a
dow nw ard tre nd. Ye t th e e arlie r summary of e mpirical e v ide nce indi-
cate s th at during th e last 50 to 75 ye ars th e re h as be e n no w ide ning in
income ine quality in th e de v e lope d countrie s but, on th e contrary, some
narrow ing w ith in th e last tw o to four de cade s. It follow s th at th e intra-
se ctor distribution-e ith e r for se ctor A or for se ctor B-must h av e
sh ow n sufficie nt narrow ing of ine quality to offse t th e incre ase calle d
for by th e factors discusse d. Spe cifically, th e sh are s of th e low e r income
groups in se ctors A and/or B must h av e incre ase d sufficie ntly to offse t
th e de cline th at w ould oth e rw ise h av e be e n produce d by a combination
of th e e le me nts sh ow n in th e nume rical illustration.
T h is narrow ing in ine quality, th e offse tting rise in th e sh are s of th e
low e r bracke ts, most like ly occurre d in th e income distribution for th e
urban groups, in se ctor B. Wh ile it may also h av e be e n pre se nt in se ctor
A, it w ould h av e h ad a more limite d e ffe ct on th e ine quality in th e coun-
tryw ide income distribution be cause of th e rapidly diminish ing w e igh t
of se ctor A in th e total. Nor w as such a narrow ing of income ine quality
in agriculture like ly: w ith industrialization, a h igh e r le v e l of te ch nology
pe rmitte d large r-scale units and, in th e Unite d State s for e xample ,
sh arpe ne d th e contrast be tw e e n th e large and succe ssful busine ss
farme rs and th e subsiste nce sh are croppe rs of th e South . Furth e rmore ,
since w e acce pt th e assumption of initially narrow e r ine quality in th e
inte rnal distribution of income in se ctor A th an in se ctor B, any signifi-
cant re duction in ine quality in th e forme r is le ss like ly th an in th e latte r.
He nce w e may conclude th at th e major offse t to th e w ide ning of in-
come ine quality associate d w ith th e sh ift from agriculture and th e
countryside to industry and th e city must h av e be e n a rise in th e income
sh are of th e low e r groups w ith in th e nonagricultural se ctor of th e
population. T h is prov ide s a le ad for e xploration in w h at se e ms to me
a most promising dire ction: conside ration of th e pace and ch aracte r of
th e e conomic grow th of th e urban population, w ith particular re fe re nce
to th e re lativ e position of low e r-income groups. Much is to be said for
th e notion th at once th e e arly turbule nt ph ase s of industrialization and
urbanization h ad passe d, a v arie ty of force s conv e rge d to bolste r th e
e conomic position of th e low e r-income groups w ith in th e urban popula-
tion. T h e v e ry fact th at afte r a w h ile , an incre asing proportion of th e
urban population w as "nativ e ," i.e ., born in citie s rath e r th an in th e
rural are as, and h e nce more able to take adv antage of th e possibilitie s
of city life in pre paration for th e e conomic struggle , me ant a be tte r
ch ance for organization and adaptation, a be tte r basis for se curing
gre ate r income sh are s th an w as possible for th e ne w ly "immigrant"
population coming from th e countryside or from abroad. T h e incre as-
ing e fficie ncy of th e olde r, e stablish e d urban population sh ould also be
take n into account. Furth e rmore , in de mocratic socie tie s th e grow ing
political pow e r of th e urban low e r-income groups le d to a v arie ty of
prote ctiv e and supporting le gislation, much of it aime d to counte ract
th e w orst e ffe cts of rapid industrialization and urbanization and to
support th e claims of th e broad masse s for more ade quate sh are s of th e
grow ing income of th e country. Space doe s not pe rmit th e discussion of
de mograph ic, political, and social conside rations th at could be brough t
to be ar to e xplain th e offse ts to any de cline s in th e sh are s of th e low e r
groups, de cline s oth e rw ise de ducible from th e tre nds sugge ste d in th e
nume rical illustration.
III. Oth e r T re nds R e late d to T h ose in Income Ine quality
One aspe ct of th e conje ctural conclusion just re ach e d de se rv e s e m-
ph asis be cause of its possible inte rre lation w ith oth e r important e le -
me nts in th e proce ss and th e ory of e conomic grow th . T h e scanty e m-
pirical e v ide nce sugge sts th at th e narrow ing of income ine quality in
th e de v e lope d countrie s is re lativ e ly re ce nt and probably did not ch ar-
acte rize th e e arlie r stage s of th e ir grow th . Like w ise , th e v arious factors
th at h av e be e n sugge ste d abov e w ould e xplain stability and narrow ing
in income ine quality in th e late r rath e r th an in th e e arlie r ph ase s of
industrialization and urbanization. Inde e d, th e y w ould sugge st w ide n-
ing ine quality in th e se e arly ph ase s of e conomic grow th , e spe cially in th e
olde r countrie s w h e re th e e me rge nce of th e ne w industrial syste m h ad
sh atte ring e ffe cts on long-e stablish e d pre -industrial e conomic and social
institutions. T h is timing ch aracte ristic is particularly applicable to fac-
tors be aring upon th e low e r-income groups: th e dislocating e ffe cts of
th e agricultural and industrial re v olutions, combine d w ith th e "sw arm-
ing" of population incide nt upon a rapid de cline in de ath rate s and th e
mainte nance or e v e n rise of birth rate s, w ould be unfav orable to th e
re lativ e e conomic position of low e r-income groups. Furth e rmore ,
th e re may also h av e be e n a pre ponde rance in th e e arlie r pe riods of fac-
tors fav oring mainte nance or incre ase in th e sh are s of top-income
groups: in so far as th e ir position w as bolste re d by gains arising out of
ne w industrie s, by an unusually rapid rate of cre ation of ne w fortune s,
w e w ould e xpe ct th e se force s to be re lativ e ly stronge r in th e e arly
ph ase s of industrialization th an in th e late r w h e n th e pace of industrial
grow th slacke ns.
One migh t th us assume a long sw ing in th e ine quality ch aracte rizing
th e se cular income structure : w ide ning in th e e arly ph ase s of e conomic
grow th w h e n th e transition from th e pre -industrial to th e industrial
civ ilization w as most rapid; be coming stabilize d for a w h ile ; and th e n
narrow ing in th e late r ph ase s. T h is long se cular sw ing w ould be most
pronounce d for olde r countrie s w h e re th e dislocation e ffe cts of th e
e arlie r ph ase s of mode rn e conomic grow th w e re most conspicuous; but
it migh t be found also in th e "younge r" countrie s like th e Unite d State s,
if th e pe riod pre ce ding marke d industrialization could be compare d w ith
th e e arly ph ase s of industrialization, and if th e latte r could be com-
pare d w ith th e subse que nt ph ase s of gre ate r maturity.
If th e re is some e v ide nce for assuming th is long sw ing in re lativ e
ine quality in th e distribution of income be fore dire ct taxe s and e xclud-
ing fre e be ne fits from gov e rnme nt, th e re is sure ly a stronge r case for
assuming a long sw ing in ine quality of income ne t of dire ct taxe s and
including gov e rnme nt be ne fits. Progre ssiv ity of income taxe s
and, in-
de e d, th e ir v e ry importance ch aracte rize only th e more re ce nt ph ase s of
de v e lopme nt of th e pre se ntly de v e lope d countrie s; in
narrow ing in-
come ine quality th e y must h av e acce ntuate d th e dow nw ard ph ase of
th e long sw ing, contributing to th e re v e rsal of tre nd in th e se cular
w ide ning and narrow ing of income ine quality.
No ade quate e mpirical e v ide nce is av ailable for ch e cking th is con-
je cture of a long se cular sw ing in income ine quality;-7 nor can th e ph ase s
be date d pre cise ly. How e v e r, to make it more spe cific, I w ould place th e
e arly ph ase in w h ich income ine quality migh t h av e be e n w ide ning, from
about 1780 to 1850 in England; from about 1840 to 1890, and particu-
larly from 1870 on in th e Unite d State s; and, from th e 1840's to th e
1890's in Ge rmany. I w ould put th e ph ase of narrow ing income in-
e quality some w h at late r in th e Unite d State s and Ge rmany th an in
England-pe rh aps be ginning w ith th e first w orld w ar in th e forme r and
in th e last quarte r of th e 19th ce ntury in th e latte r.
Is th e re a possible re lation be tw e e n th is se cular sw ing in income
ine quality and th e long sw ing in oth e r important compone nts of th e
grow th proce ss? For th e olde r countrie s a long sw ing is obse rv e d in th e
rate of grow th of population-th e upw ard ph ase re pre se nte d by acce l-
e ration in th e rate of grow th re fle cting th e e arly re duction in th e de ath
rate w h ich w as not offse t by a de cline in th e birth rate (and in some
case s w as accompanie d by a rise in th e birth rate ); and th e dow nw ard
ph ase re pre se nte d by a sh rinking in th e rate of grow th re fle cting th e
more pronounce d dow nw ard tre nd in th e birth rate . Again, in th e olde r
countrie s, and also pe rh aps in th e younge r, th e re may h av e be e n a
se cular sw ing in th e rate of urbanization, in th e se nse th at th e propor-
tional additions to urban population and th e me asure s of inte rnal mi-
gration th at produce d th is sh ift of population probably incre ase d for
a w h ile -from th e e arlie r much low e r le v e ls; but th e n te nde d to diminish
as urban population came to dominate th e country and as th e rural
re se rv oirs of migration be came proportionally much smalle r. For old,
and pe rh aps for young countrie s also, th e re must h av e be e n a se cular
sw ing in th e proportions of sav ings or capital formation to total e co-
nomic product. Pe r capita product in pre -industrial time s w as not large
e nough to pe rmit as h igh a nationw ide rate of sav ing or capital forma-
tion as w as attaine d in th e course of industrial de v e lopme nt: th is is
7Prokopov ich 's data on Prussia, from th e source cite d in footnote 1, indicate a sub-
tantial w ide ning in income ine quality in th e e arly pe riod. T h e sh are of th e low e r 90 pe r
ce nt of th e population de cline s from 73 pe r ce nt in 1854 to 65 pe r ce nt in 1875; th e sh are
of th e top 5 pe r ce nt rise s from 21 to 25 pe r ce nt. But I do not know e nough about th e
data for th e e arly ye ars to e v aluate th e re liability of th e finding.
sugge ste d by pre se nt comparisons be tw e e n ne t capital formation rate s
of 3 to 5 pe r ce nt of national product in unde rde v e lope d countrie s and
rate s of 10 to 15 pe r ce nt in de v e lope d countrie s. If th e n, at le ast in th e
olde r countrie s, and pe rh aps e v e n in th e younge r one s-prior to initia-
tion of th e proce ss of mode rn de v e lopme nt-w e be gin w ith low se cular
le v e ls in th e sav ings proportions, th e re w ould be a rise in th e e arly
ph ase s to appre ciably h igh e r le v e ls. We also know th at during re ce nt
pe riods th e ne t capital formation proportion and e v e n th e gross, faile d
to rise and pe rh aps e v e n de cline d.
Oth e r tre nds migh t be sugge ste d th at w ould possibly trace long
sw ings similar to th ose for ine quality in income structure , rate of grow th
of population, rate of urbanization and inte rnal migration, and th e pro-
portion of sav ings or capital formation to national product. For e x-
ample , such sw ings migh t be found in th e ratio of fore ign trade to
dome stic activ itie s; in th e aspe cts, if w e could only me asure th e m prop-
e rly, of gov e rnme nt activ ity th at be ar upon marke t force s (th e re
must h av e be e n a ph ase of incre asing fre e dom of marke t force s,
giv ing w ay to gre ate r inte rv e ntion by gov e rnme nt). But th e sugge stions
alre ady made suffice to indicate th at th e long sw ing in income ine quality
must be v ie w e d as part of a w ide r proce ss of e conomic grow th , and
inte rre late d w ith similar mov e me nts in oth e r e le me nts. T h e long alte r-
nation in th e rate of grow th of population can be se e n partly as a cause ,
partly as an e ffe ct of th e long sw ing in income ine quality w h ich w as
associate d w ith a se cular rise in re al pe r capita income le v e ls. T h e long
sw ing in income ine quality is also probably close ly associate d w ith th e
sw ing in capital formation proportions-in so far as w ide r ine quality
make s for h igh e r, and narrow e r ine quality for low e r, country-w ide sav -
ings proportions.
IV. Comparison of De v e lope d and Unde rde v e lope d Countrie s
Wh at is th e be aring of th e e xpe rie nce of th e de v e lope d countrie s upon
th e e conomic grow th of unde rde v e lope d countrie s? Le t us e xamine
brie fly th e data on income distribution in th e latte r, and spe culate upon
some of th e implications.
As migh t h av e be e n e xpe cte d, such data for unde rde v e lope d countrie s
are scanty. For th e pre se nt purpose distributions of family income for
India in 1949-50, for Ce ylon in 1950, and for Pue rto R ico in 1948 w e re
use d. Wh ile th e cov e rage is narrow and th e margin of e rror w ide , th e
data sh ow th at income distribution in th e se unde rde v e lope d countrie s
is some w h at more une qual th an in th e de v e lope d countrie s during th e
pe riod afte r th e se cond w orld w ar. T h us th e sh are s of th e low e r 3 quin-
tile s are 28 pe r ce nt in India, 30 pe r ce nt in Ce ylon, and 24 pe r ce nt in
Pue rto R ico-compare d w ith 34 pe r ce nt in th e Unite d State s and 36
pe r ce nt in th e Unite d Kingdom. T h e sh are s of th e top quintile are 55
pe r ce nt in India, 50 pe r ce nt in Ce ylon, and 56 pe r ce nt in Pue rto R ico,
compare d w ith 44 pe r ce nt in th e Unite d State s and 45 pe r ce nt in th e
Unite d Kingdom.8
T h is comparison is for income be fore dire ct taxe s and e xcluding fre e
be ne fits from gov e rnme nts. Since th e burde n and progre ssiv ity of dire ct
taxe s are much gre ate r in de v e lope d countrie s, and since it is in th e
latte r th at substantial v olume s of fre e e conomic assistance are e xte nde d
to th e low e r-income groups, a comparison in te rms of income ne t of
dire ct taxe s and including gov e rnme nt be ne fits w ould only acce ntuate
th e w ide r ine quality of income distributions in th e unde rde v e lope d coun-
trie s. Is th is diffe re nce a re liable re fle ction of w ide r ine quality also
in th e distribution of se cular income le v e ls in unde rde v e lope d countrie s?
Ev e n disre garding th e margins of e rror in th e data, th e possibility
raise d e arlie r in th is pape r th at transie nt disturbance s in income le v e ls
may be more conspicuous unde r conditions of primitiv e mate rial and
e conomic te ch nology w ould affe ct th e comparison just made . Since th e
distributions cite d re fle ct th e annual income le v e ls, a gre ate r allow ance
sh ould pe rh aps be made for transie nt disturbance s in th e distributions
for th e unde rde v e lope d th an in th ose for th e de v e lope d countrie s.
Wh e th e r such a corre ction w ould oblite rate th e diffe re nce is a matte r
on w h ich I h av e no re le v ant e v ide nce .
Anoth e r conside ration migh t te nd to support th is qualification. Un-
de rde v e lope d countrie s are ch aracte rize d by low av e rage le v e ls of in-
come pe r capita, low e nough to raise th e que stion h ow th e populations
manage to surv iv e . Le t us assume th at th e se countrie s re pre se nt fairly
unifie d population groups, and e xclude , for th e mome nt, are as th at
combine large nativ e populations w ith small e nclav e s of nonnativ e ,
priv ile ge d minoritie s, e .g., Ke nya and R h ode sia, w h e re income ine qual-
ity, be cause of th e e xce ssiv e ly h igh income sh are s of th e priv ile ge d
minority, is appre ciably w ide r th an e v e n in th e unde rde v e lope d coun-
trie s cite d abov e .9 On th is assumption, one may infe r th at in countrie s
'
For source s of th e se data se e "R e gional Economic T re nds and Le v e ls of Liv ing," sub-
mitte d at th e Norman Waite Harris Foundation Institute of th e Univ e rsity of Ch icago in
Nov e mbe r 1954 (in pre ss in th e v olume of proce e dings). T h is pape r, and an e arlie r one ,
"Unde rde v e lope d Countrie s and th e Pre -industrial Ph ase s in th e Adv ance d Countrie s: An
Atte mpt at Comparison," pre pare d for th e World Population Me e tings in R ome h e ld in
Se pte mbe r 1954 (in pre ss) discuss issue s raise d in th is se ction.
'In one ye ar since th e se cond w orld w ar, th e non-African group in South e rn R h ode sia,
w h ich accounte d for only 5 pe r ce nt of total population, re ce iv e d 57 pe r ce nt of total in-
come ; in Ke nya, th e minority of only 2.9 pe r ce nt of total population, re ce iv e d 51 pe r ce nt
of total income ; in North e rn R h ode sia, th e minority of only 1.4 pe r ce nt of total population,
re ce iv e d 45 pe r ce nt of total income . Se e Unite d Nations, National Income and Its Dis-
tribution in Unde rde v e lope d Cou4ntrie s, Statistical Pape r, Se r. E, no. 3, 1951, T able 12, p.
19.
w ith low av e rage income , th e se cular le v e l of income in th e low e r brac-
ke ts could not be be low a fairly sizable proportion of av e rage income
oth e rw ise , th e groups could not surv iv e . T h is me ans, to use a pure ly
h ypoth e tical figure , th at th e se cular le v e l of th e sh are of th e low e st
de cile could not fall far sh ort of 6 or 7 pe r ce nt, i.e ., th e low e st de cile
could not h av e a pe r capita income le ss th an six- or se v e n-te nth s of th e
countryw ide av e rage . In more adv ance d countrie s, w ith h igh e r av e rage
pe r capita income s, e v e n th e se cular sh are of th e low e st bracke t could
e asily be a smalle r fraction of th e countryw ide av e rage , say as small as
2 or 3 pe r ce nt for th e low e st de cile , i.e ., from a fifth to a th ird of th e
countryw ide av e rage -w ith out implying a mate rially impossible e co-
nomic position for th at group. T o be sure , th e re is in all countrie s con-
tinuous
pre ssure to raise th e re lativ e position of th e bottom-income
groups; but th e fact re mains th at th e low e r limit of th e proportional
sh are in th e se cular income structure is h igh e r w h e n th e re al country-
w ide pe r capita income is low th an w h e n it is h igh .
If th e long-te rm sh are of th e low e r-income groups is large r in th e
unde rde v e lope d th an in th e av e rage countrie s, income ine quality in th e
forme r sh ould be narrow e r, not w ide r as w e h av e found. How e v e r, if
th e low e r bracke ts re ce iv e large r sh are s, and at th e same time th e v e ry
top bracke ts also re ce iv e large r sh are s-w h ich w ould me an th at th e
inte rme diate income classe s w ould not sh ow as gre at a progre ssion from
th e bottom-th e ne t e ffe ct may w e ll be w ide r ine quality. T o illustrate ,
le t us compare th e distributions for India and th e Unite d State s. T h e
first quintile in India re ce iv e s 8 pe r ce nt of total income , more th an th e 6
pe r ce nt sh are of th e first quintile in th e Unite d State s. But th e se cond
quintile in India re ce iv e s only 9 pe r ce nt, th e th ird 11, and th e fourth
16; w h e re as in th e Unite d State s, th e sh are s of th e se quintile s are 12,
16, and 22 re spe ctiv e ly. T h is is a rough statistical re fle ction of a fairly
common obse rv ation re lating to income distributions in unde rde v e lope d
compare d w ith de v e lope d countrie s. T h e forme r h av e no "middle "
classe s: th e re is a sh arp contrast be tw e e n th e pre ponde rant proportion
of population w h ose av e rage income is w e ll be low th e ge ne rally low
countryw ide av e rage , and a small top group w ith a v e ry large re lativ e
income e xce ss. T h e de v e lope d countrie s, on th e oth e r h and, are ch arac-
te rize d by a much more gradual rise from low to h igh sh are s, w ith sub-
stantial groups re ce iv ing more th an th e h igh countryw ide income
av e rage , and th e top groups se curing smalle r sh are s th an th e comparable
ordinal groups in unde rde v e lope d countrie s.
It is, th e re fore , possible th at e v e n th e distributions of se cular income
le v e ls w ould be more une qual in unde rde v e lope d th an in de v e lope d
countrie s-not in th e se nse th at th e sh are s of th e low e r bracke ts w ould
be low e r in th e forme r th an in th e latte r, but in th e se nse th at th e sh are s
of th e v e ry top groups w ould be h igh e r and th at th ose of th e groups
be low th e top w ould all be significantly low e r th an a low countryw ide
income av e rage . T h is is e v e n more like ly to be true of th e distribution
of income ne t of dire ct taxe s and inclusiv e of fre e gov e rnme nt be ne fits.
But w h e th e r a h igh probability w e igh t can be attach e d to th is conje cture
is a matte r for furth e r study.
In th e abse nce of e v ide nce to th e contrary, I assume th at it is true :
th at th e se cular income structure is some w h at more une qual in unde r-
de v e lope d countrie s th an in th e more adv ance d-particularly in th ose
of We ste rn and North e rn Europe and th e ir e conomically de v e lope d
de sce ndants in th e Ne w World (th e Unite d State s, Canada, Australia,
and Ne w Ze aland). T h is conclusion h as a v arie ty of important impli-
cations and le ads to some pre gnant que stions, of w h ich only a fe w can
be state d h e re .
In th e first place , th e w ide r ine quality in th e se cular income structure
of unde rde v e lope d countrie s is associate d w ith a much low e r le v e l of
av e rage income pe r capita. T w o corollarie s follow -and th e y w ould
follow e v e n if th e income ine qualitie s w e re of th e same re lativ e range
in th e tw o groups of countrie s. First, th e impact is far sh arpe r in th e
unde rde v e lope d countrie s, w h e re th e failure to re ach an alre ady low
countryw ide av e rage spe lls much gre ate r mate rial and psych ological
mise ry th an similar proportional de v iations from th e av e rage in th e
rich e r, more adv ance d countrie s. Se cond, positiv e sav ings are obv iously
possible only at much h igh e r re lativ e income le v e ls in th e unde rde v e lope d
countrie s: if in th e more adv ance d countrie s some sav ings are possible
in th e fourth quintile , in th e unde rde v e lope d countrie s sav ings could be
re alize d only at th e v e ry pe ak of th e income pyramid, say by th e top
5 or 3 pe r ce nt. If so, th e conce ntration of sav ings and of asse ts is e v e n
more pronounce d th an in th e de v e lope d countrie s; and th e e ffe cts of
such conce ntration in th e past may se rv e to e xplain th e pe culiar ch arac-
te ristics of th e se cular income structure in unde rde v e lope d countrie s
today.
T h e se cond implication is th at th is une qual income structure pre -
sumably coe xiste d w ith a low rate of grow th of income pe r capita. T h e
unde rde v e lope d countrie s today h av e not alw ays lagge d be h ind th e
pre se ntly de v e lope d are as in le v e l of e conomic pe rformance ; inde e d,
some of th e forme r may h av e be e n th e e conomic le ade rs of th e w orld in
th e ce nturie s pre ce ding th e last tw o. T h e countrie s of Latin Ame rica,
Africa, and particularly th ose of Asia, are unde rde v e lope d today be -
cause in th e last tw o ce nturie s, and e v e n in re ce nt de cade s, th e ir rate of
e conomic grow th h as be e n far low e r th an th at in th e We ste rn World-
and low inde e d, if any grow th th e re w as, on a pe r capita basis. T h e
unde rlying sh ifts in industrial structure , th e opportunitie s for inte rnal
mobility and for e conomic improv e me nt, w e re far more limite d th an
in th e more rapidly grow ing countrie s now in th e de v e lope d cate gory.
T h e re w as no h ope , w ith in th e life time of a ge ne ration, of a significantly
pe rce ptible rise in th e le v e l of re al income , or e v e n th at th e ne xt ge ne ra-
tion migh t fare much be tte r. It w as th is h ope th at se rv e d as an impor-
tant and re alistic compe nsation for th e w ide ine quality in income dis-
tribution th at ch aracte rize d th e pre se ntly de v e lope d countrie s during
th e e arlie r ph ase s of th e ir grow th .
T h e th ird implication follow s from th e pre ce ding tw o. It is quite
possible th at income ine quality h as not narrow e d in th e unde rde v e lope d
countrie s w ith in re ce nt de cade s. T h e re is no e mpirical e v ide nce to ch e ck
th is conje ctural implication, but it is sugge ste d by th e abse nce , in th e se
are as, of th e dynamic force s associate d w ith rapid grow th th at in th e
de v e lope d countrie s ch e cke d th e upw ard tre nd of th e uppe r-income
sh are s th at w as due to th e cumulativ e e ffe ct of continuous conce ntra-
tion of past sav ings; and it is also indicate d by th e failure of th e politi-
cal and social syste ms of unde rde v e lope d countrie s to initiate th e gov e rn-
me ntal or political practice s th at e ffe ctiv e ly bolste r th e w e ak positions
of th e low e r-income classe s. Inde e d, th e re is a possibility th at ine quality
in th e se cular income structure of unde rde v e lope d countrie s may h av e
w ide ne d in re ce nt de cade s-th e only qualification be ing th at w h e re
th e re h as be e n a re ce nt sh ift from colonial to inde pe nde nt status, a
priv ile ge d, nonnativ e minority may h av e be e n e liminate d. But th e im-
plication, in te rms of th e income distribution among th e nativ e popula-
tion prope r, still re mains plausible .
T h e sombe r picture just pre se nte d may be an ov e rsimplifie d one . But
I be lie v e th at it is sufficie ntly re alistic to le nd w e igh t to th e que stions
it
pose s-que stions
as to th e be aring of th e re ce nt le v e ls and tre nds in
income ine quality, and th e factors th at de te rmine th e m, upon th e future
prospe ct of unde rde v e lope d countrie s w ith in th e orbit of th e fre e w orld.
T h e que stions are difficult, but th e y must be face d unle ss w e are
w illing comple te ly to disre gard past e xpe rie nce or to e xtrapolate me -
ch anically ov e rsimplifie d impre ssions of past de v e lopme nt. T h e first
que stion is: Is th e patte rn of th e olde r de v e lope d countrie s like ly to be
re pe ate d in th e se nse th at in th e e arly ph ase s of industrialization in th e
unde rde v e lope d countrie s income ine qualitie s w ill te nd to w ide n be fore
th e le v e ling force s be come strong e nough first to stabilize and th e n re -
duce income ine qualitie s? Wh ile th e future cannot be an e xact re pe tition
of th e past, th e re are alre ady ce rtain e le me nts in th e pre se nt conditions
of unde rde v e lope d socie tie s, e .g., "sw arming" of population due to sh arp
cuts in de ath rate s unaccompanie d by de cline s in birth rate s-th at
th re ate n to w ide n ine quality by de pre ssing th e re lativ e position of low e r-
income groups e v e n furth e r. Furth e rmore , if and w h e n industrialization
be gins, th e dislocating e ffe cts on th e se socie tie s, in w h ich th e re is ofte n
an old h arde ne d crust of e conomic and social institutions, are like ly to
to be quite sh arp-so sh arp as to de stroy th e positions of some of th e
low e r groups more rapidly th an opportunitie s e lse w h e re in th e e conomy
may be cre ate d for th e m.
T h e ne xt que stion follow s from an affirmativ e answ e r to th e first.
Can th e political frame w ork of th e unde rde v e lope d socie tie s w ith stand
th e strain w h ich furth e r w ide ning of income ine quality is like ly to ge n-
e rate ? T h is que ry is pe rtine nt if it is re alize d th at th e re al pe r capita
income le v e l of many unde rde v e lope d socie tie s today is low e r th an th e
pe r capita income le v e l of th e pre se ntly de v e lope d socie tie s be fore th e ir
initial ph ase s of industrialization. And ye t th e stre sse s of th e disloca-
tions incide nt to e arly ph ase s of industrialization in th e de v e lope d coun-
trie s w e re sufficie ntly acute to strain th e political and social fabric of
socie ty, force major political re forms, and some time s re sult in civ il w ar.
T h e answ e r to th e se cond que stion may be ne gativ e , e v e n grante d
th at industrialization may be accompanie d by a rise in re al pe r capita
product. If, for many groups in socie ty, th e rise is e v e n partly offse t by
a de cline in th e ir proportional sh are in total product; if, conse que ntly,
it is accompanie d by w ide ning of income ine quality, th e re sulting pre s-
sure s and conflicts may ne ce ssitate drastic ch ange s in social and political
organization. T h is giv e s rise to th e ne xt and crucial que stion: How
can e ith e r th e institutional and political frame w ork of th e unde rde -
v e lope d socie tie s or th e proce sse s of e conomic grow th and industrializa-
tion be modifie d to fav or a sustaine d rise to h igh e r le v e ls of e conomic
pe rformance and ye t av oid th e fatally simple re me dy of an auth oritarian
re gime th at w ould use th e population as cannon-fodde r in th e figh t for
e conomic ach ie v e me nt? How to minimize th e cost of transition and
av oid paying th e h e av y price -in inte rnal te nsions, in long-run ine ffi-
cie ncy in prov iding me ans for satisfying w ants of h uman be ings as
indiv iduals-w h ich th e inflation of political pow e r re pre se nte d by
auth oritarian re gime s re quire s?
Facing th e se acute proble ms, one is cognizant of th e dange rs of tak-
ing an e xtre me position. One e xtre me -particularly te mpting to us-
is to fav or re pe tition of past patte rns of th e now de v e lope d countrie s,
patte rns th at, unde r th e marke dly diffe re nt conditions of th e pre se ntly
unde rde v e lope d countrie s, are almost bound to put a strain on th e e xist-
ing social and e conomic institutions and e v e ntuate in re v olutionary e x-
plosions and auth oritarian re gime s. T h e re is dange r in simple analogie s;
in arguing th at be cause an une qual income distribution in We ste rn
Europe in th e past le d to accumulation of sav ings and financing of basic
capital formation, th e pre se rv ation or acce ntuation of pre se nt income
ine qualitie s in th e unde rde v e lope d countrie s is ne ce ssary to se cure th e
same re sult. Ev e n disre garding th e implications for th e low e r-income
groups, w e may find th at in at le ast some of th e se countrie s today th e
consumption prope nsitie s of uppe r-income groups are far h igh e r and
sav ings prope nsitie s far low e r th an w e re th ose of th e more puritanical
uppe r-income groups of th e pre se ntly de v e lope d countrie s. Be cause th e y
may h av e prov e d fav orable in th e past, it is dange rous to argue th at
comple te ly fre e marke ts, lack of pe naltie s implicit in progre ssiv e taxa-
tion, and th e like are indispe nsable for th e e conomic grow th of th e now
unde rde v e lope d countrie s. Unde r pre se nt conditions th e re sults may be
quite th e opposite -w ith draw al of accumulate d asse ts to re lativ e ly
"safe " ch anne ls, e ith e r by fligh t abroad or into re al e state ; and th e
inability of gov e rnme nts to se rv e as basic age nts in th e kind of capital
formation th at is indispe nsable to e conomic grow th . It is dange rous to
argue th at, be cause in th e past fore ign inv e stme nt prov ide d capital
re source s to spark satisfactory e conomic grow th in some of th e smalle r
Europe an countrie s or in Europe 's de sce ndants across th e se as, similar
e ffe cts can be e xpe cte d today if only th e unde rde v e lope d countrie s can
be conv ince d of th e ne e d of a "fav orable climate ." Ye t, it is e qually
dange rous to take th e opposite position and claim th at th e pre se nt prob-
le ms are e ntire ly ne w and th at w e must de v ise solutions th at are th e
product of imagination unre straine d by know le dge of th e past, and
th e re fore full of romantic v iole nce . Wh at w e ne e d, and I am afraid it
is but a truism, is a cle ar pe rce ption of past tre nds and of conditions
unde r w h ich th e y occurre d, as w e ll as know le dge of th e conditions th at
ch aracte rize th e unde rde v e lope d countrie s today. With th is as a be gin-
ning, w e can th e n atte mpt to translate th e e le me nts of a prope rly unde r-
stood past into th e conditions of an ade quate ly unde rstood pre se nt.
V. Concluding R e marks
In concluding th is pape r, I am acute ly conscious of th e me age rne ss
of re liable information pre se nte d. T h e pape r is pe rh aps 5 pe r ce nt
e mpirical information and 95 pe r ce nt spe culation, some of it possibly
tainte d by w ish ful th inking. T h e e xcuse for building an e laborate struc-
ture on such a sh aky foundation is a de e p inte re st in th e subje ct and
a w ish to sh are it w ith me mbe rs of th e Association. T h e formal and no
le ss ge nuine e xcuse is th at th e subje ct is ce ntral to much of e conomic
analysis and th inking; th at our know le dge of it is inade quate ; th at a
more coge nt v ie w of th e w h ole fie ld may h e lp ch anne l our inte re sts and
w ork in inte lle ctually profitable dire ctions; th at spe culation is an e ffe c-
tiv e w ay of pre se nting a broad v ie w of th e fie ld; and th at so long as it
is re cognize d as a colle ction of h unch e s calling for furth e r inv e stigation
rath e r th an a se t of fully te ste d conclusions, little h arm and much good
may re sult.
Le t me add tw o final comme nts. T h e first be ars upon th e importance
of additional know le dge and a be tte r v ie w of th e se cular structure of
pe rsonal income distribution. Since th is distribution is a focal point at
w h ich th e functioning of th e e conomic syste m impinge s upon th e h uman
be ings w h o are th e liv ing me mbe rs of socie ty and for w h om and th rough
w h om th e socie ty ope rate s, it is an important datum for unde rstanding
th e re actions and be h av ior patte rns of h uman be ings as produce rs, con-
sume rs, and sav e rs. It follow s th at be tte r know le dge and compre h e nsion
of th e subje ct are indispe nsable , not only in and of itse lf but also as
a ste p in le arning more about th e functioning of socie ty-in both th e
long and sh ort run. With out be tte r know le dge of th e tre nds in se cular
income structure and of th e factors th at de te rmine th e m, our unde r-
standing of th e w h ole proce ss of e conomic grow th is limite d; and any
insigh t w e may de riv e from obse rv ing ch ange s in countryw ide aggre -
gate s ov e r time w ill be de fe ctiv e if th e se ch ange s are not translate d into
mov e me nts of sh are s of th e v arious income groups.
But more th an th at, such know le dge w ill contribute to a be tte r e v alua-
tion of past and pre se nt th e orizing on th e subje ct of e conomic grow th .
It w as pointe d out in th e ope ning line s of th is pape r th at th e fie ld is dis-
tinguish e d by loose ne ss of conce pts, e xtre me scarcity of re le v ant data,
and, particularly, pre ssure s of strongly h e ld opinions. T h e distribution
of national product among th e v arious groups is a subje ct of acute inte r-
e st to many and is discusse d at le ngth in any h alf-articulate socie ty.
Wh e n e mpirical data are scanty, as th e y are in th is fie ld, th e natural
te nde ncy in such discussion is to ge ne ralize from w h at little e xpe rie nce
is av ailable -most ofte n th e sh ort stre tch of h istorical e xpe rie nce w ith in
th e h orizon of th e inte re ste d sch olar, w h ich is brough t to be ar upon th e
particular policy proble ms in th e fore front. It h as re pe ate dly be e n ob-
se rv e d th at th e grand dynamic e conomics of th e classical sch ool of th e
late 18th and e arly 19th ce nturie s w as a ge ne ralization, th e main e mpiri-
cal conte nts of w h ich w e re th e obse rv e d de v e lopme nts during h alf to
th re e quarte rs of a ce ntury in England, th e moth e r country of th at
sch ool; and th at it bore many of th e limitations w h ich th e bre v ity and
e xce ptional ch aracte r of th at pe riod and th at place naturally impose d
upon th e th e ore tical structure . It is also possible th at much of Marxian
e conomics may be an ov e rge ne ralization of impe rfe ctly unde rstood
tre nds in England during th e first h alf of th e 19th ce ntury w h e n income
ine quality may h av e w ide ne d; and th at e xtrapolations of th e se tre nds
(e .g., incre asing mise ry of th e w orking classe s, polarization of socie ty,
e tc.) prov e d w rong be cause due re gard w as not giv e n to th e possible
e ffe cts upon th e e conomic and social structure of te ch nological ch ange s,
e xte nsion of th e e conomic syste m to much of th e th e n unoccupie d w orld,
and th e v e ry structure of h uman w ants. Wide r e mpirical foundations,
2S T HE AMER ICAN ECONOMIC R EVIEW
obse rv ation of a gre ate r v arie ty of h istorical e xpe rie nce , and a re cogni-
tion th at any body of ge ne ralizations te nds to re fle ct some limite d
stre tch of h istorical e xpe rie nce must force us to e v aluate any th e ory-
past or pre se nt-in te rms of its e mpirical conte nts and th e conse que nt
limits of its applicability-a pre ce pt w h ich naturally sh ould also be
applie d to th e ov e rsimplifie d ge ne ralizations containe d in th e pre se nt
pape r.
My final comme nt re late s to th e dire ctions in w h ich furth e r e xplora-
tion of th e subje ct is like ly to le ad us. Ev e n in th is simple initial ske tch ,
findings in th e fie ld of de mograph y w e re use d and re fe re nce s to political
aspe cts of social life w e re made . Uncomfortable as are such v e nture s
into unfamiliar and pe rh aps tre ach e rous fie lds, th e y can not and sh ould
not be av oide d. If w e are to de al ade quate ly w ith proce sse s of e conomic
grow th , proce sse s of long-te rm ch ange in w h ich th e v e ry te ch nological,
de mograph ic, and social frame w orks are also ch anging-and in w ays
th at de cide dly affe ct th e ope ration of e conomic force s prope r-it is
ine v itable th at w e v e nture into fie lds be yond th ose re cognize d in re ce nt
de cade s as th e prov ince of e conomics prope r. For th e study of th e e co-
nomic grow th of nations, it is impe rativ e th at w e be come more familiar
w ith findings in th ose re late d social discipline s th at can h e lp us unde r-
stand population grow th patte rns, th e nature and force s in te ch nological
ch ange , th e factors th at de te rmine th e ch aracte ristics and tre nds in
political institutions, and ge ne rally patte rns of be h av ior of h uman
be ings-partly as a biological spe cie s, partly as social animals. Effe ctiv e
w ork in th is fie ld ne ce ssarily calls for a sh ift from marke t e conomics
to political and social e conomy.

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