Piketty on Kuznets By Scott Sumner

I’ve started reading Thomas Piketty’s now-famous Capital in the Twenty-First Century. Over at MoneyIllusion.com I have some observations on the opening chapter (which is all I have read so far.) Here I’d like to focus on one section of the introduction, the discussion of Simon Kuznets. In this passage (p. 14) Piketty discusses Kuznets’ claim that income initially becomes more unequal as countries grow richer, but then ends up becoming more equal as high-income levels are achieved:

The data Kuznets had presented in his 1953 book suddenly became a powerful political weapon.(15) He was well aware of the highly speculative nature of his theorizing.(16) Nevertheless, by presenting such an optimistic theory in the context of a “presidential address” to the main professional association of US economists, an audience that was inclined to believe and disseminate the good news delivered by their prestigious leader, he knew that he would wield considerable influence: thus the “Kuznets curve” was born. In order to make sure that everyone understood what was at stake he took care to remind his listeners that the intent of his optimistic predictions was quite simply to maintain the underdeveloped countries “within the orbit of the free world.”(17) In large part, then, the theory of the Kuznets curve was a product of the Cold War.

When reading the Piketty book, I immediately noticed that he looked at things from a left-wing perspective. So I thought I would check to see whether this paragraph accurately summarized Kuznets’ writings. And this is where my problems began. Notice the footnotes 15, 16 and 17. Footnote 16 quotes one sentence and then cites a book entitled Shares of Upper Income Groups in Income and Savings, (1953, pages 24 to 26.) Footnote 17 cites page 28 from the same source.

I found this book on the Internet, but the two sentences were nowhere to be found. So then I tried googling the quoted sentences, and found a 1955 AER paper by Kuznets. Even better it was 28 pages long. The sentence that was supposed to be on pages 24 to 26 of the 1953 book was on page 26 of the AER paper, and the sentence that was supposed to be on page 28 was actually on page 24 of the same paper. I was slightly annoyed at having to do all this searching, but it’s only one observation and it’s certainly not an important mistake. When I actually read the article, however, I became much more concerned. Piketty’s description of Kuznets’ views was not even close to being accurate. Even worse, his discussion of Kuznets seemed slightly insulting. For instance, on page 15 he refers to the “magical Kuznets curve theory,” which seems pretty condescending to me.

I have two big objections with Pikitty’s characterization of Kuznets—the overall impression he creates, and the specific use of the term “optimistic.” In fact, Kuznets was extremely pessimistic about income inequality in the third world, and didn’t think simplistic free market policies would work. Let’s look at the entire paragraph containing that comment about keeping third world countries in the “orbit” of the free world:

The somber picture just presented may be an oversimplified one. But I believe that it is sufficiently realistic to lend weight to the questions it poses-questions as to the bearing of the recent levels and trends in income inequality, and the factors that determine them, upon the future prospect of underdeveloped countries within the orbit of the free world.

Nothing about “intent” (although clearly Kuznets didn’t favor communism.) More importantly, the entire 6-page section on developing countries containing this paragraph is almost entirely pessimistic, I’d say extremely pessimistic, about the prospects for the third world. Here’s another example, which contains the only glimmer of hope at the end:

Facing these acute problems, one is cognizant of the dangers of taking an extreme position. One extreme-particularly tempting to us-is to favor repetition of past patterns of the now developed countries, patterns that, under the markedly different conditions of the presently underdeveloped countries, are almost bound to put a strain on the existing social and economic institutions and eventuate in revolutionary explosions and authoritarian regimes. There is danger in simple analogies; in arguing that because an unequal income distribution in Western Europe in the past led to accumulation of savings and financing of basic capital formation, the preservation or accentuation of present income inequalities in the underdeveloped countries is necessary to secure the same result. Even disregarding the implications for the lower-income groups, we may find that in at least some of these countries today the consumption propensities of upper-income groups are far higher and savings propensities far lower than were those of the more puritanical upper-income groups of the presently developed countries. Because they may have proved favorable in the past, it is dangerous to argue that completely free markets, lack of penalties implicit in progressive taxation, and the like are indispensable for the economic growth of the now underdeveloped countries. Under present conditions the results may be quite the opposite-withdrawal of accumulated assets to relatively “safe” channels, either by flight abroad or into real estate; and the inability of governments to serve as basic agents in the kind of capital formation that is indispensable to economic growth. It is dangerous to argue that, because in the past foreign investment provided capital resources to spark satisfactory economic growth in some of the smaller European countries or in Europe’s descendants across the seas, similar effects can be expected today if only the underdeveloped countries can be convinced of the need of a “favorable climate.” Yet, it is equally dangerous to take the opposite position and claim that the present problems are entirely new and that we must devise solutions that are the product of imagination unrestrained by knowledge of the past, and therefore full of romantic violence. What we need, and I am afraid it is but a truism, is a clear perception of past trends and of conditions under which they occurred, as well as knowledge of the conditions that characterize the underdeveloped countries today. With this as a beginning, we can then attempt to translate the elements of a properly understood past into the conditions of an adequately understood present.

To quickly summarize the 6-page section on developing countries, it’s 5 pages of almost unrelieved pessimism, ending on page 26 with a call to avoid the extremes of laissez-faire and communism. It certainly is not an “optimistic” product of the Cold War; it’s not even a pessimistic product of the Cold War. Nor did he indicate that this was his “intent.” Piketty totally misrepresents what Kuznets was saying. Indeed I didn’t see anything in the Kuznets paper suggesting that it was at all related to the Cold War, or that he had an optimistic message for developing countries. Not even close.

Now go back to the original Piketty quotation, and look at the sentence that begins “Nevertheless,” and includes remarks like “inclined to believe and disseminate the good news delivered by their prestigious leader.” As with the “magical Kuznets curve” I find this slightly condescending. More importantly, it’s not really accurate. Indeed Kuznets’ paper seems far more scholarly, and far less like propaganda, than Piketty’s book. Kuznets goes to great lengths to downplay his results. Here is the opening paragraph of the conclusion, which follows immediately after the section on developing countries that contains the “free world” quote cited by Piketty:

In concluding this paper, I am acutely conscious of the meagerness of reliable information presented. The paper is perhaps 5 per cent empirical information and 95 per cent speculation, some of it possibly tainted by wishful thinking. The excuse for building an elaborate structure on such a shaky foundation is a deep interest in the subject and a wish to share it with members of the Association. The formal and no less genuine excuse is that the subject is central to much of economic analysis and thinking; that our knowledge of it is inadequate; that a more cogent view of the whole field may help channel our interests and

work in intellectually profitable directions; that speculation is an effective way of presenting a broad view of the field; and that so long as it is recognized as a collection of hunches calling for further investigation rather than a set of fully tested conclusions, little harm and much good may result.

Here Kuznets is being much too modest. Reading this paper, I get the impression that Kuznets is a true scholar who tries to avoid overselling his results, exactly opposite of what Piketty implies. In fairness, Piketty includes part of this paragraph in footnote 16. But most readers only read the text, which is quite misleading. In the text itself, Piketty suggests Kuznets knew how speculative his results were, but tried to convince the profession despite these private doubts. Nothing could be further from the truth. If anything, Piketty himself seems more like the scholar who makes excessive claims for his model. (I discuss that model here.)

Piketty’s defenders might correctly respond that he doesn’t actually misquote Kuznets. But that’s much too low a standard for responsible scholarship. When discussing someone else’s work it’s essential that you correctly convey their views to the reader, who rarely has time to track down all the original sources. This is the first time I’ve tried to do that with Piketty; let’s hope it’s an aberration. However I certainly would not accept his interpretation of other writings without some form of corroboration.

PS. In the introduction Piketty says that Smith (Adam?) has more “political prejudices” than Ricardo. I’d like to know what experts on the history of economic thought think about that. I’m not even sure exactly what “political prejudices” mean. Perhaps to a left-winger like Piketty the term means someone who holds free-market views. Although it’s been many years since I read The Wealth of Nations, Smith seemed to me to be a scholar who was remarkably unprejudiced.

Update: A commenter pointed out that the reference was correct in the French version, which had the 1955 AER article and the correct page numbers.