Economics As Politics

Economists like to perceive themselves as deriving objective positive mathematical theories and that they are not involved in the messiness of politics. It all seems very well and good, but, for some reason, economic theory always tended to take sides and be used by contradictory political currents, from trade liberalization and de-regulation of markets to protectionist policy. The economic discipline has developed many tools to help understand the complex nature of economies – however, it is a far cry from the natural sciences. This article will discuss a peculiar form of the economic as politics scenario: the Kuznets curve.

Simon Kuznets was an American economist and statistician who produced a monumental work labelled “Shares of Upper Income Groups in Income and Saving," dealing with 35 years of data. The data he collated allowed him to derive the change in deciles over time. One of his conclusions was that the US upper decile share of national income had decreased by 10%. As noted by Piketty, the time measured was of significant turbulence from the Great Depression to World War Two.  As such, even Kuznets was extremely wary of generalizing and theorizing based on those results. He explicitly stated in his paper, “This is perhaps 5 per cent empirical information and 95 per cent speculation, some of it possibly tainted by wishful thinking.” 

Yet during a presidential press - notice the political setting- he generalized his data in his address entitled “Economic Growth and Income Inequality.” He suggests that as per capita income rises, income inequality follows, but then at an inevitable point, income inequality starts decreasing. The inverted U-Shape curve usually demonstrates this. He offers possible explanations, for example, as countries industrialize, the center of the economy becomes in the urban area, thus creating a “rural-urban income gap.”  Later on, as economies grow, the institutions of democracy start becoming established, such as welfare.  At this stage, society experiences a trickle-down effect and an increase in per capita income. 

This came about during a tide of economic thought predicting doomsday. Karl Marx's predictions of the capital accumulation scenario states there is a tendency for capital to become concentrated in the hands of a few. He predicts either that the rate-of-return of capital would diminish to zero, which will lead to brutal conflict between capitalists, or that the capitalist share of income would increase to such a high amount that workers would revolt as their share of national income would have been cut tremendously. This followed another tide of Ricardian economics in which land is scarce. As such, the landowners' share of the national income will continuously rise, reducing the percentage of national income available for the rest of the population. Both predict the same result: a rise in inequality and a disruption of social equilibrium. The optimistic thought of Kuznets played a significant role during a time (the cold war) when a pessimistic outlook on capitalism was widespread, and the red revolts were rampant. Simply stating that everything is fine as long as economies grow was highly convenient.

However, inequality is again on the rise. The share of national income of the top decile has significantly increased since 1970, reaching pre-WWII levels. The question of inequality is again back in question. This is often explained by referencing the managerial revolutions or the recent slow growth that puts an emphasis on inherited wealth. 

For such an idea underlying the Kuznets curve to become mainstream clearly shows the dynamic of theories in economics and social sciences, which is heavily politicized. The doomsday scenario was used by the Marxist theorist and Kuznets curves by the capitalist, both to advocate their causes. The politics involved in social theory has not miraculously disappeared and is still a primary determinant of mainstream thought. We still see the Kuznets environmental curve in which solving the development issue miraculously solves the climate crisis. Individuals must understand the politics and motives behind the thought to gain a clearer view of economics.