Inequality and Instability: A Study of the World Economy Just before the Great Crisis

By James K. Galbraith | Go to book overview

CHAPTER 3
Pay Inequality and World Development

In his 1955 presidential address to the American Economic Association, Simon Kuznets offered a simple, elegant argument relating inequality to the process of industrialization. Before industry, say in late-feudal Great Britain or the early northern United States, agriculture consisted largely of small freeholds, tenantry, and family farms. Income from work was limited by the natural scope of family labor and the talents and efforts of the village craftsman. Factories and city life introduced division of labor, leading to higher living standards for a rising urban working class, including factory workers and eventually professionals, engineers, and machinists. Since this group enjoyed more income than their country cousins, economic inequality rose.

Later on, migration and ultimately the industrialization of agriculture displaced the farmers from their land. As the agricultural population declined in proportion to the total, so too did the significance of the urban-rural income gap. Therefore, inequality would decline as incomes continued to rise, simply because the population transitioned from being primarily rural to primarily urban. Cities, with all their economic diversity, are naturally more unequal than the countryside, so matters would not again return to an egalitarian starting point. But Kuznets did expect that as industrialization matured, unionization and social democracy would reduce the initially high inequalities of the townsfolk, so that overall inequality would continue to decline as industrial development deepened.


What Kuznets Meant

The basic mechanism of Kuznets’s argument was thus the transition from country to town and from farm to factory as average incomes rose. The consequence was a definite relationship between inequality and income: inequality would

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