Kuznets Curve

A Kuznets Curve is an Economic Model which predicts that economic development proceeds through a natural cycle of economic inequality driven by market forces which at first increase economic inequality and then decrease it after a certain average income is attained.

• See: Simon Kuznets, Economic Development, Human Capital, Industrialization, Capitalism, Trickle-Down Economics.

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References

2014

• (Wikipedia, 2014) ⇒ http://en.wikipedia.org/wiki/Kuznets_curve Retrieved:2014-4-29.
  • In economics, a Kuznets curve represents graphically the hypothesis advanced by Simon Kuznets in the 1950s and 1960s that as an economy develops, a natural cycle of economic inequality occurs, driven by market forces which at first increase inequality, and then decrease it after a certain average income is attained. One explanation of such a progression suggests that early in development investment opportunities for those who have money multiply, while an influx of cheap rural labor to the cities holds down wages. Whereas in mature economies, human capital accrual, or an estimate of cost that has been incurred but not yet paid, takes the place of physical capital accrual as the main source of growth; and inequality slows growth by lowering education levels because poor people lack finance for their education in imperfect credit-markets. The Kuznets curve implies that as a nation undergoes industrialization – and especially the mechanization of agriculture – the center of the nation’s economy will shift to the cities. As capitalism causes a significant rural-urban inequality gap (the owners of firms would be profiting, while labourers from lagging industries and agriculture production would be losing income), rural populations are expected to decrease as urban populations increase, due to people migrating to cities in search of income. Inequality is then expected to decrease when a certain level of average income is reached and the processes of industrialization – democratization and the rise of the welfare state – allow for the trickle-down of the benefits from rapid growth, and increase the per-capita income. Kuznets believed that inequality would follow an inverted “U” shape as it rises and then falls again with the increase of income per-capita. Kuznets curve diagrams show an inverted U curve, although variables along the axes are often mixed and matched, with inequality or the Gini coefficient on the Y axis and economic development, time or per-capita incomes on the X axis. Since 1991 the environmental Kuznets curve (EKC) has become a standard feature in the technical literature of environmental policy, though its application there has been strongly contested.

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