Since 1953, the United Nations has published an influential set of standards for national income statistics called the System of National Accounts (SNA). In the 1970s and 1980s, these statistics came under assault for ignoring women’s work, culminating in the influential critique of Marilyn Waring, If Women Counted published in 1988. (Edit: Specifically, the statistics were criticized for treating differently unpaid/non-market work performed by men from that of women. Much of men’s work was argued to be worth trying to estimate a value for even though no price was directly paid for it, while women’s work was simply left out.) What I would not have guessed is how much those critiques had already been internalized by the experts working in the UN. Among the papers of Richard Stone (lead author of the original 1953 SNA), I found this gem from a 1982 United Nations expert paper laying out an agenda for revising the SNA:

To a considerable degree, the [UN] Blue Book’s borderline between subsistence output, to be included in production and consumption, and household activity, to be excluded, reflects a sexist view that is gradually changing. Subsistence activities, for the most part, are male activities; household activities are female ones. Thus winemaking is included, cooking is not; caring for animals is, caring for children is not; and communal volunteer projects like road building and similar activities are, but those of women’s groups running volunteer community service programs like libraries health services, and school services are not. This disparity in treatment should be remedied.

And yet to present, 30 years later, not that much has changed. What went wrong? The report’s next paragraph offers some insight:

The problems of valuation are more difficult, however, for the kinds of non-market activity not now included in the SNA. In order to value household activity, for instance, it is necessary to decide whether to use the opportunity cost of the housewife in the labour market or the cost of hiring comparable household services o the market. For analyzing resource allocation an opportunity cost valuation might be appropriate, but for measuring consumption of household services, a market valuation might be better.

As I’ve argued elsewhere, from the 1920s to present, the objections to including housework have very rarely been on the principled ground that housework shouldn’t count but rather on the (seemingly) practical objection that valuing it is very hard. And yet, the end result is the same – housework remains (largely) uncounted (in official national accounts).

Today, I’m blogging from the Harvard University Archives. I’m five boxes deep into the Simon Kuznets collection, for my second visit related to my dissertation research. I just came across a letter that, while not especially important to my dissertation, seemed like it might be of wider use to anyone interested in the history of the “Kuznets Curve.” Simon Kuznets, in addition to spearheading the first official US national income statistics in 1932-1934, is probably most famous for this curve/hypothesis.* In his presidential address to the American Economics Association in December of 1954, later published as Economic Growth and Income Inequality, Kuznets argued that income inequality and economic growth might have an inverted-U shaped relationship. That is, as economic growth/development increases, inequality first goes up and then comes back down.

Kuznets based this empirical story on a few decades worth of data from the US and UK, and asserted in the conclusion that: “The paper is perhaps 5 per cent empirical information and 95 per cent speculation, some of it possibly tainted by wishful thinking.” (1955: 26) Since 1955, the paper has generated an entire literature asking whether or not the curve is real, whether it’s reversed in the past 30 years to create a new pattern, and so on. Much of the early research supporting the Kuznets curve came from cross-national studies which mapped inequality against current GDP/capita and showed the expected inverted-U shaped relationship. These studies, like Kuznets’, lacked longitudinal data. The recent consensus seems to be that the Kuznets curve does not hold within countries (e.g. Gallup 2012). That is, within a particular country, the relationship between economic growth and income inequality does not follow the expected path. Here are two graphs from Gallup 2012 that help sell the argument. The first is the relationship between log income and inequality, which looks like a Kuznets curve (though as Gallup notes, the fit is not quadratic for unlogged data):

The second is the author’s estimates of within-country income inequality trajectories (each line is one country). Note the chaos, and the absence of any coherent story, with some tendency towards a U-shape (not a upside-down U!):

Gallup further notes that Kuznets’ original data only had half of the original story. Yes, Kuznets shows a decrease in inequality in the US and UK in the late 19th century to post-WWII period. But Kuznets has no data on the initial upsurge in inequality! That is, Kuznets only has the falling half of the curve. Gallup graphs Kuznets’ income inequality data against historical gdp data now available from the work of Angus Madison to give some sense of what Kuznets was seeing:

Gallup (2012: 6) summarizes:

Kuznets showed that inequality fell in two high-income countries as they grew richer after World War I, but he had no evidence of rising inequality at low income levels. Ironically, Kuznets’ prediction that inequality will rise during the early stages of development, for which he had no evidence, is better remembered than his prediction that inequality will fall at higher incomes.

What did Kuznets have, if not data? He had a model. Specifically, Kuznets motivated his proposed empirical story (rising then falling inequality) with a two sector model of income inequality. Kuznets argued that agricultural incomes were likely as or more equal than industrial/urban incomes, but industrial incomes were much higher on average. Thus, as workers moved from agricultural to industrial labor, inequality would increase (low agricultural wages to higher industrial wages), until so few workers were in agriculture that a tipping point was reached and inequality came back down. This story falls apart, however, if agricultural incomes in the pre-development period are actually more unequal than industrial ones, because “if agricultural incomes are more unequal than industrial wages, perhaps due to unequal land ownership, movement out of agriculture into industry could reduce inequality right away.” (Gallup 2012: 7)

Ok, so why did Kuznets think that agricultural incomes were more equal than industrial ones? An archival document I just perused before starting this post sheds some light on the answer: Kuznets had some intuitions backed by absolutely no data. Data on income distribution are still poor now, and were even worse back in the 1950s, with historical data being extremely limited to a handful of studies (some conducted by Kuznets himself). These studies did not readily break incomes down by urban/rural or industrial/agricultural divides. Kuznets wrote to one of his collaborators, Selma Goldsmith (then at the Office of Business Economics, what is now the Bureau of Economic Analysis) to ask about the data she had been working on to produce official income distribution data for the United States (see, e.g., Goldsmith et al. 1954). In a letter dated August 15, 1954, Kuznets writes about his current work on economic growth and income inequality:

In my model, I somehow began with the assumption that inequality within the ag. sector is lesser than within the non-ag—although I had no evidence whatsoever. … the distributions that are available (in your D. of C. publication and elsewhere) show inequality among the ag. group (i.e. farm operator families) to be greater than among the non-ag—certainly in recent years. … Yet one would expect that with the much wider range of income opportunities in the non-ag sector, the inequality in size distribution would be appreciably wider in the latter. … Do you have any explanation for it?**

Let’s just stress that again: Kuznets had absolutely no evidence that inequality within the agricultural sector was less than the industrial one. Kuznets guesses that this discrepancy between his theoretical intuition and the data has something to do with the data not quite matching what they want – there’s higher year-to-year variability in farm incomes, but in the long-run the inequality within families might be less than appears in the data, or something like that. He’s not sure. And that uncertainty, among many others, is reflected in his strong caveats at the end of presidential address.

Years later, Kuznets himself would abandon the curve and caution against looking for historical laws of development, especially in cross-sectional data (Moran 2005). And yet the debate over it lives on, as does the search for laws of economic growth and development.

*In 1971, Kuznets won the Nobel Prize in economics, “for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and social structure and process of development.”
**Papers of Simon Kuznets, Harvard University Archives, HUGFP88.10 Misc. Correspondence, Box 4.

I’m currently reading through some of Karl Polanyi’s less famous works. I had always thought Polanyi was not a fan of Adam Smith based on his amazing, “Oh, Snap!” worthy comment in The Great Transformation. Polanyi argues that Smith was wrong about the nautralness of the motivation to “truck, barter, and exchange” and that for most of human history, trucking, bartering and exchanging are nowhere to be found. Polanyi then memorably says of Smith, “In retrospect it can be said that no misreading of the past ever proved more prophetic of the future.” (GT 45) So, Smith was utterly wrong about the 18th century and before, but prescient about the 19th century. Overall, not so positive, especially from someone like Polanyi who is so concerned with creating useful theories of economic life that make sense in different times and places.

In “The Place of Economies in Societies”, Polanyi shows a bit more love to Smith. More specifically, in the previously unpublished lecture notes collected by Dalton, who edited the collection Primitive, Archaic and Modern Economies, Polanyi argues that economic thought has gone through five periods in the early 18th century. The first, which included Quesnay and Smith, still saw the economic system as part of society. Only with Townsend, Ricardo and Malthus do economists begin to think of the economic sphere as autonomous. As a side note, Polanyi’s reading of Quesnay is impressive, and very useful for me. Polanyi notes that Quesnay had been a vet before studying economic affairs, and that “In his physiology Quesnay had used the word economy in the sense of husbandry or householding of the animal body.” (PAME: 125) The idea of circulation inside the body was relatively new, and Quesnay adapted the idea to the social body. I need to dig into that claim for my dissertation, as it’s a fascinating hypothesis about how we came to talk about economies the way we do now.

Polanyi’s reading of Smith is equally helpful. Writing here in 1947 according to the footnotes, Polanyi is in some sense anticipating the dramatic rise of Paul Samuelson and his famous economics textbooks which claimed that Adam Smith emphasized the power of the invisible hand of the market to produce socially optimal outcomes. Polanyi disagreed, noting:

Reference to the ‘hidden hand,’ which made the self-interest of the butcher and the baker ‘serve me with a meal,’ have been exaggerated out of all proportion. Adam Smith wished to discourage the idea that the self-interest of the merchant naturally benefited the community. He demanded, e.g., that the British government should rule India, not the merchants of the East India Company, whose interests, he asserted, were contrary to those of the population, while the government’s interests ran parallel to that interest (for instance, in terms of taxation). Self-interest is not yet differentiated into economic motives of employers and employed. All through, the approach is still institutional, historical, and societal. (PAME: 128-129)

Given Gavin Kennedy’s recent work on the history of the invisible hand metaphor, and my own reading of the passage, I couldn’t agree more with Polanyi. In some ways, I’m coming to appreciate more Emma Rothschild’s reading of the invisible hand as a “mildly ironic joke”. In particular, Smith devoted several extensive passages to showing how merchants (and others) often colluded to act in their own interests and against that of the public (think of: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” from Book I, Ch. X). And Smith’s hatred of corporations was evident, as noted by Polanyi. In the famous invisible hand passage, Smith notes that some merchants prefer to safeguard their capital and thus invest locally rather than abroad, in spite of the higher possible returns in foreign trade:

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (Book IV, Ch. II)

So, his point is that most merchants are most of the time out for themselves and do all sorts of terrible things that are not at all in the public interest to get their way. But, some merchants, those that out of fear (and not civic-mindedness) support domestic over foreign industry, end up promoting the interests of society by accident. Hence the irony of the joke.

But to reiterate the overall point of this post: Polanyi was right about Smith, and far less negative than I had originally thought.

Update: For continuing discussion of this post, see also Gavin Kennedy’s comments and my response over at Adam Smith’s Lost Legacy.