The Kuznets Curve: Identifying the Source of Economic Inequality

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Throughout the mid-to-late 20th century, many cited the Kuznets curve as proof that capitalism eventually increases economic equality. French economist Thomas Piketty, however, argued otherwise, that capitalism actually increases economic inequality.

While economic inequality has definitely increased, one cannot attribute that to capitalism itself. We at the Zero Theft Movement argue that bad actors-crony capitalists and corrupt lawmakers–break free markets, rigging the economy against the public.

What is the Kuznets Curve?

U.S. economist Simon Kuznets’ lasting impact has been his ‘Kuznets Curve,’ a hypothesis he proposed in 1954:

Inequality increases in the early stages of a society’s urbanization and industrialization. Then peaks at the mid-stage. Lastly it plummets as the economy continues to evolve and incomes increase. 

This progression can be plotted as a bell curve/inverted-U.

Kuznets curve

source: Wikimedia Commons

Kuznets Ratio

The ‘Kuznets ratio’ refers to a measurement of the ratio of income transferred to the highest-earning households (upper 20%) vs. income transferred to the lowest-earning households (lowest 20% or 40%). Kuznets found a completely even distribution (expressed as ‘1’) when comparing upper 20% to the lowest 20%. Upper 20% compared to lowest 40% resulted in a distribution of 0.5. 

The best explanation for the Kuznets ratio was that rural workers had shifted from agriculture to industrial jobs in urban areas. Economic inequality, Kuznets argued, would decrease after 50% of the shift force switches over to the higher paying sector.

Kuznets’ Hypothesis 

A hypothesis (5% empirical/95% speculation, according to Kuznets), the curve holds that the free market economy eventually delivers prosperity and equality. A range of powerful economic forces, even in the absence of government interventions such as taxes, would counteract any trends causing inequality.

Kuznets commented on his own hypothesis, pointing to a limited data set and the extraordinary effects two World Wars and the Great Depression must have had during his period of study (1913-1948). Only time would tell if the Kuznets curve would hold up to scrutiny. 

Thirty brokerage firms paid about $900 million to settle the civil suit contending they “schemed with one another for years to fix prices on the NASDAQ stock market,” the New York Times reported. They allegedly did so by not using odd-eighth NASDAQ quotes. See what the ZT community has uncovered about the matter.

Environmental Kuznets Curve

We would be remiss if we didn’t mention the environmental Kuznets curve, an noteworthy adaptation to the nobel laureate’s original theory.

Proposed by economists Gene Grossman and Alan Krueger in their joint 1995 study, the environmental Kuznets curve, as you might imagine, provides a model to explain how developing a country affects the environment. Initial economic development, which typically involves industrialization, will harm the environment. However, after the nation has achieved a certain level of economic growth, it reaches a turning point. The nation continues to improve production while reducing its environmental damages through new technology and investment. 

Environmental Kuznets CurveThe environmental Kuznets curve has its fair share of critics, however. For one, carbon footprints in many developing and developed nations alike appear to be on the rise. China, the European Union, and the U.S. account for 41.5% of total global greenhouse gas emissions. These include some of the most developed countries and territories, yet they continue to damage the environment (at least, in one way). Perhaps a sign of change, 189 countries signed the Paris Climate Agreement, a treaty to combat climate change, in 2016. Industry regulation does serve as one indication that a country has reached that turning point on the environmental Kuznets curve. 

In truth, research overwhelmingly disfavors the applicability of the environmental Kuznets curve on the global scale. A particularly unsettling study has found that poisonous particles produced by fossil fuel combustion have led to millions of deaths. Growth in economic production, many argue, does not mean a nation will decide to undo the environmental damage it has produced.

But back to the original Kuznets curve. 

Thomas Piketty counters the Kuznets Curve

Although counter arguments challenging the Kuznets curve had been made (notably citing the East Asian Miracle), it wasn’t until the 21st century that Kuznets’ hypothesis came into question in a profound way. French economist Thomas Piketty, in his 2014 book Capital in the Twenty-First Century, argues that the time period Kuznets drew his data from represents an interruption in the long-growing trend of inequality. Two World Wars and the Great Depression had a significant effect on all facets of U.S. life.

Piketty’s data, in fact, produced a U curve, a reflection of the Kuznets curve. The trough or dip represents the data from 1913-1948, Kuznets’ period of study. Piketty contends that increasing inequality is the standard result of a capitalist economy.

income per capita and inequality_Kuznets_curve

Piketty backed his claim with the theoretical model: r > g. 

  • r = the rate of return on capital
  • g = the rate of economic growth 

Current capitalist systems operate where the rate of return on capital exceeds the rate of economic growth, in turn increasing inequality. This is because profits and other income from capital often grows faster than wage income (what most citizens rely on to live). Piketty, unlike Kuznets, expanded his study globally and produced the U curve throughout emerging and established economies. The U.S., more than any other nation, has the largest disparity in wealth, with the top 1% holding a third of it

Piketty’s fix, which he deems technically viable but ‘utopian,’ is to institute a progressive global tax on capital and make international financial information transparent.

Arguments against Piketty

Since the release of Piketty’s refutation of the Kuznets curve, many have agreed with his point that economic inequality has risen and will continue to rise. That being said, much evidence has surfaced refuting his proposed fix and reasoning behind his U-curve. 

For example, the savings rate of the rich in the U.S. is surprisingly low when compared with the wealthy in other countries. Economic inequality should, then, be lower in America, but it isn’t. Our country routinely appears at the top of the list of nations with the greatest degree of economic inequality. 

Another major pushback comes against his suggestion of a progressive global tax. In the U.S. at least, the major reason for wealth disparity has most convincingly been attributed to housing inequalities. Property, a relatively safe investment, tends to reliably appreciate over time. Homeowners, therefore, have an asset that continues to increase in value. Renters, on the other hand, do not have an asset that appreciates in value and more of their paycheck goes to paying increasing rent prices.   


Housing comprises roughly 40% of the U.S. total capital stock

The Zero Theft Perspective on the Kuznets Curve

Piketty’s conclusions seem somewhat flawed, and the Kuznets curve has not played out as the Nobel laureate expected.

So why’s economic inequality rising? 

Without a doubt, Thomas Piketty was correct that economic inequality is rising. 

But we believe the Kuznets curve would have actually ended up being proven true if we had maintained an ethical capitalism. 

Here’s the Zero Theft perspective:

Economic inequality in the U.S. really started growing its roots with the end of the Bretton Woods Agreement. The capitalist economy appeared healthy and equitable. Real weekly earnings and real GDP were not only increasing, but also growing at a similar rate. The graph below shows how, with the end of the Bretton Woods Agreement in 1971, real GDP continued its consistent growth while real median weekly earnings plateaued.  

Kuznets curve

source: Wikimedia Commons

The Kuznets curve didn’t account for the great deal of corruption that would eventually establish the rigged economy the public suffers through today.

That sudden levelling off of real median weekly earnings, to be sure, is not because of capitalists. 

It’s because of the bad actors who rig the economy that has caused wealth to multiply for the 1%. 

We have a sordid interweaving of politics and business to blame for the economic inequalities.    

An article in the Scientific American aptly states, “A vicious spiral has formed: economic inequality translates into political inequality, which leads to rules that favor the wealthy, which in turn reinforces economic inequality.”

How our Economy might have been rigged against us

If the economy is rigged, it’s hard to say whether the Kuznets curve would have ended up proving true. 

Think of the 2008 financial crisis, when investors allegedly pushed  the global economy to near collapse with predatory CDSs (Credit Default Swaps), market manipulation, and other practices that allowed them to make millions in bonuses while countless Americans suffered. 

Think of how big pharmaceutical companies managed to keep the non-interference clause in Medicare Part D. Not to mention how the pharmaceutical industry unethically stifles competition by offering pay-for-delay deals to generic manufacturers and secure as many biologics patents as possible to prevent others from producing a biosimilar option. Without the capital to compete with big pharma, the risk and cost of entry is too great for many to even try. 

Think of how telecom/internet providers have thwarted the FCCs attempts to establish net neutrality by lobbying and paying off members of Congress. Not only are the costs prohibitive to low-income households, our access is being limited based on the provider’s business interests. Lacking internet connectivity hinders upwards mobility, as it has become a requirement for job training and education (to name a few). The few providers have carved out territories to deliberately eliminate competition, allowing all of them to hike up prices. 

Wehe, a group of researchers at Northeastern University, University of Massachusetts–Amherst and Stony Brook University, conducted a study on traffic shaping showing evidence that “nearly every US cellular ISP (CISP) throttles (i.e., sets a limit on available bandwidth)…for at least one streaming video provider.” 

Is your internet service provider giving you the service you paid for? See what the ZT community has reported on the matter…


The Realization of the Kuznets Curve

Economist Jonathan Ostry, along with others at the IMF, performed a study showing how economic equality improves the quality of life for all. With ethical capitalism, a system involving no layer of rigging or theft, we can all prosper. We should not think it a pipe dream or an impossibility. If we forget partisan politics and band together, we can collectively kick out the crony capitalists and corrupt lawmakers.  

It’s important to realize that our opposition is not the rich who have grafted and earned what they now have. They made their wealth in an ethical way and do not deserve condemnation–unless they remain silent about theft.  

Realization of the Kuznets Curve

The problem is the plutocrats who unethically use their vast war chests to break free markets. For example, they hire lobbyists who get Congress to sell out. This means laws enabling the 1% to profit even more off the everyday citizen pass.  And laws that hurt the 1% and provide some relief to the everyday citizen are blocked.

This, at least, should be clear. The U.S. economic system will continue to increase inequality if it continues as is. You have the opportunity to make the Kuznets curve a reality, but you need to start acting NOW.

Do you think the Economy is Rigged?  

This isn’t so much about the potential flaws of capitalism. Or whether the Kuznets curve ultimately ends up being true. Before we can even address those matters, there might be a bigger problem at hand.

Cronies might be using their money to rig the economy overwhelmingly in their favor. Breaking free markets isn’t capitalism; it’s just corrupt.  

Economic rigging rips all of us off, including YOU. The lawmakers who have succumbed to regulatory capture have helped create 50 years of wage stagnation and violations of antitrust laws. Our community seeks to end the corporatocracy and rid moneyed interests from politics. Our mission is, and will continue to be, on waking up 330 million American citizens to the truth. We can all profit from an ethical, powerful, and safe economy if we stand up against the crony capitalists. 

Standard Disclaimer

The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.   

Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since Congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.  

View how much is being stolen, according to the public

Take matters into your hands

Your vote helps citizens figure out how much is getting ripped off and by whom. That gives us the power, based on strong evidence, to start holding those gaming the system accountable for profiting unethically. All of us must decide democratically, by a vote.

Investigate your areas of interest

All areas of our economy could be experiencing rigging by crony capitalists and corrupt officials. We need to systematically investigate each instance in order to find out if best evidence suggests it is truly rigged. 

Alternatively, find an area that interests you most.

Serve your fellow citizens as a citizen investigator

The success of our movement rests in your hands, the leaders willing to dedicate time to conduct investigations into potentially rigged areas of the economy. With your valuable work, the movement has no solid ground to stand on, no foundations, no proof, to actually hold those corrupting our system accountable for their actions.

Commitment to nonpartisanship

The rigged layer causes all of us to suffer, regardless of our political allegiances. If we are to eliminate rigged economy theft, we have to set aside our differences and band together against crony capitalists and corrupt officials. 

Beyond the Kuznets curve

An educated public is an empowered public. 

We regularly publish informative articles on, just like this one on the Kuznets curve, that teach you all about the rigged layer of the economy in short, digestible pieces. You can better protect yourself and others from the schemes of crony capitalists by reading our articles.