Economic Growth and Income Distribution

Author(s): W. Paul Strassmann

Source: The Quarterly Journal of Economics, Vol. 70, No. 3 (Aug., 1956), pp. 425-440
Published by: Oxford University Press
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ECONOMIC

GROWTH AND INCOME DISTRIBUTION*

By W.

PAUL STRASSMANN

incomeequality,
425. - II. Economicgrowthand growing
I. Introduction,
439.
427. - III. Empiricalevidence,432.- IV. Conclusion,

I
Accordingto a strawman versionof static pricetheoryand welfareeconomics,wages will inevitablybe at an optimumlevel under
marketconditionsof perfectcompetition. Due to the freeinterplay
of supplyand demand, pricesof all productivefactorsand marginal
to maxiwillhave come to restat a level corresponding
productivities
mum economic efficiency.Governmentaction contributesto efficiencyonly by providingsocial overhead capital - highways,sanitation,education,order- and by preventingindustrialwaterpollution and other social losses. Particularlygovernmentinterference
with pricingitselfwould mean dislocationand impairedefficiency.
Hence minimumwage legislationwould adjust inequityonlyat some
increase in economic waste. An unequal distributionof property
income may be morallyinequitable,but is conceivedto have little
bearingon technicalefficiency.'
These conclusionsare usuallybased on one or moreofthe following assumptions:perfectdivisibilityof productsand factors,increasdemand,a given state of
ing or constantreal costs,income-inelastic
technology,and the impossibilityof making interpersonalutility
comparisons. ProfessorHarry G. Johnsonhas added the assumptionsthat all pricesand interestrates remainconstant,that changes
in the asset holdings of individuals and the repercussionson the
* ProfessorsDudley Dillard, Daniel Hamberg,and Allan Gruchyof the
Universityof Marylandhave read an earlierdraftof this article,and their
are acknowledged
withthanks.
suggestions
1. See, forexample,Tibor Scitovsky,Welfareand Competition,
pp. 55, 60,
179; or DenstoneBerry,"ModernWelfareAnalysisand the Formsof Income
and Social Policy,ed. Alan T. Peacock
in IncomeRedistribution
Redistribution,"
(London:JonathanCape, 1954),p. 51. But see also TiborScitovsky,"Two ConLXII (April1954),
ceptsof ExternalEconomies,"JournalofPoliticalEconomy,
and Foresight,"and
"ExternalEconomies,Investment,
143-51;J. A. Stockfish,
Tibor Scitovsky,"A Reply," JournalofPoliticalEconomy,LXIII (Oct. 1955),
446-51.
425

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426

QUARTERLY JOURNAL OF ECONOMICS

volumeofinvestmentcan be ignored,and that all goods and services

are producedby one homogeneousindustry.2
If these assumptionsare relaxed,however,the elasticityof substitutionofcapitalforlabor,the relativeincomeelasticitiesofdemand
forwage goods and "quality" goods, and, above all, the possibilities
forexploitingincreasingreturnsbecome highlyimportantin determiningthe ultimateeffectsof measuresredistributing
income. It is
the purposeof this paper to show that when the discussionis placed
against the backgroundof a growing,fullyemployed economy,a
direct correlation between income inequality and productivity
becomesapparent:
1. Given the annual volume of saving and investmentin a
competitiveeconomy,the less income inequalityis requiredto distribute factors of productionamong various industries,the more
efficiently
will resourcesbe convertedinto goods and services.
of income can raise the marginalefficiency
2. A redistribution
ofcapital and increasethevolumeofsavingand investmentby inducing a shiftto mass-productionindustriesand by stimulatingtechnologicalprogress.
This inversecorrelationbetween economicgrowthand income
inequality is implicitin ProfessorNurkse's doctrine of "balanced
growth"throughsimultaneousinvestmentover a range of complementaryindustries. Nurkse believed that such investmentwould
enlargethe aggregatesize of the marketand investmentincentives
all around because, "People workingwith moreand bettertools in a
numberof complementary
projectsbecomeeach other'scustomers."3
if
the
the
bulk
of
industries
Obviously
output of the complementary
is to be consumedby workersin these industries,the workersmust
also receivethe bulk ofthe new purchasingpower. Nurkse,however,
confinedhimselfto underdevelopedeconomies. We shall analyze his
in income equality also affect
case and tryto show that differences
the growthof developed countries.
The idea that reducedincomeinequalitymay accelerategrowth
by maintainingfullemploymentdoes not concernus here. This was
2. HarryG. Johnson,"The Macro-economics
of Income Redistribution,"

Income Redistributionand Social Policy, op. cit., p. 20.

3. RagnarNurkse,"SomeInternational
AspectsoftheProblemofEconomic
Development,"AmericanEconomicReview,XLII (May 1952),572. See also his

Problems of Capital Formation in UnderdevelopedCountries (New York: Oxford

UniversityPress, 1953). Also P. N. Rosenstein-Rodan,

"Problemsof Industrializationof Eastern and South Eastern Europe," EconomicJournal,LIII
(June-Sept.1943).

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ECONOMIC GROWTH AND INCOME DISTRIBUTION

427

theproblemofKeynesand Hobson,whoconsideredincomeinequality
or oversaving,and thereforea cause
a cause of underconsumption,
ofdepressionin the shortrunand diminishedgrowthin thelongrun.4
ofincomebecause it affects
They wereconcernedwiththe distribution
rateof consumption. We, on the otherhand, are conthe aggregate
cernedwiththe distributionof incomebecause it affectsthe distribution of consumption. Our conclusionscan thereforebe consistent
withunchangedor withdecreasedratesof consumption.
II
large population,
It is our contentionthat, given a sufficiently
economicgrowthdepends not only on capital formationand technological progress,but also on growingincome equality, which we
shall later redefineas consumptionequality.
We may illustratethe relationshipbetweenincomedistribution
by an economyin whicha homogeneouslaborsupply
and productivity
in agricultureand in whicha small groupoflandemployed
is largely
half
thenationalincome. Some productsare exported,
ownersreceives
the landownersto invest all theirsavings
enable
and these exports
these
amountto 5 percentofthenational
Let
us
savings
say
abroad.
the
have been in the habit of spending
that
landowners
incomeand
their
investments. The population
the
returns
on
foreign
abroad all
do not occur, and year after
and
innovations
is stable, inventions
the national income
account,
international
the
for
except
year,
remainsthe same.
Finally, however, the landowners decide to import superior
agriculturaltools. Productivitydoubles,and half the farmworkers
become available forotherpurposes. That portionof half the crop
that, in effect,was once receivedby the released workersmay now
partlyaccrue to those farmworkerswho remainemployed;but it is
not unreasonableto suppose that most will go to the landowners.
Afterall, theirinvestmentmade the release of labor possible. Since
it is improbable that the landownerscan personallyconsume an
increasedshareofthe crop,theymustre-employthe releasedworkers
if they are to have a returnon theirinvestment. They may even
provide the workerswith trainingand furthercapital equipment
4. H. A. Hobson, The Evolutionof Modern Capitalism, rev. ed., pp. 377 ff.,
and The IndustrialSystem,an Inquiry intoEarned and UnearnedIncome,pp. 333 ff.,

Employp. 373. KennethK. Kurihara,"Distribution,

Keynes,GeneralTheory,
ed. KennethK. Kurihara,
Economics,
ment,and SecularGrowth,"Post-Keynesian
Press,1954),pp. 251-73.
(New Brunswick:RutgersUniversity

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428

QUARTERLY JOURNAL OF ECONOMICS

fromabroad. Let us assumetheexportindustriescannot be expanded.

Can the releasedworkersbe employedin newmass-production,
massmarketdomesticindustries,balanced-growthfashion?
By definition,
any investmentwhichaltersthe nationaldistribution of incomein favorof the landownersmustreducethe portionof
the labor forceworkingforitselfor decreasethe relativeefficiency
of
that portion. Regardless of whetherwage-goodsor quality-goods
productionis made more efficient,
the productivecapacity of the
quality-goodssector must increase faster. With all but rapidly
diminishingincomeinequality,everynew machinemust create as a
by-producta greatersupplyofgardeners,footmen,and luxurycraftsmen, satisfyingever more marginal landowner wants with ever
decreasingproductivity. The exploitationof increasingreturnsin
some occupationswould thereforebe partlyoffsetby the transferof
workersto otheroccupationswith sharplydecreasingreturns. The
primaryassumptioninvolved is that the landowners'propensityto
consumethe servicesof chauffeurs,
craftsmen,etc., is greaterthan
that of workers. To the extentthat craftsmenare employedonly
because the volumeofdemandis too small,the effectofinequalityon
will vary inverselywiththe size of a populationor market.
efficiency
Other things being the same, inequality would thereforebe more
significantin Iceland than in the United States. Luxury cars are
mass-producedin America,but it is significantthat today "automation" pays in the manufactureof Ford V-8 but not Lincolnengines.5
Production can, of course, increase regardless of a growing
inequalityof incomes. But it may increase less than the possible
maximum. If a different
pattern of income distributioncan shift
some workersinto moreefficient,
particularlydecreasingcost industries,that is, if the portionof the labor forceworkingin industries
capable of intensivemechanizationcan be increased,then income
redistributioncan accelerate economic growth.6 In our model, all
5. TheNew YorkTimes,Dec. 18, 1955,sec. 6, p. 9.
6. Beforethe conceptofincomeelasticityof demandwas developed,Hicks
believedthat a minimumwage law would lead to a shiftto capital-intensive
industriesand that, other thingsbeing equal, unemployment
would result.
Increaseddemandforlaborin capital-intensive
industries
wouldnot fullyoffset
decreaseddemandin labor-intensive
industries. Hicks, The Theoryof Wages,
p. 13.
In anotherconnectionHicks foundthat if consumers
of relativelycapitalusing productshave become richerrelativelyto consumerswho spend their
incomeon labor-intensive
products,therelativeshareoflaborwillincrease. He
concluded,however,that "thisis not an effectabout whichmuchcan be said."
"A RevisedTheoryofDistribution,"
ReviewofEconomicStudies,Oct. 1936,p. 8.
It is possiblethat Hicks has sincerevisedhis opinionson thesequestionsas he

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ECONOMIC GROWTH AND INCOME DISTRIBUTION

429

the released workerscan be employedin easily mechanizedmassproductionindustriesonly if the national income incrementoveraccruesto them. But in thiscase theremay be verylittle
whelmingly
incentiveforthe landownersto make the investment.
To illustrate numericallythe effectof differencesin income
inequalityon capital accumulationand the use of labor,let us adopt
some arbitraryvalues forour model country. The populationmight
consistof 1,000,000workersand 10,000landownersand theirdependents. Real income per week might be 100,000,000pesos, divided
equally between landlords and workers. This means a wage per
laborerof 50 pesos weeklyor 2,600 pesos annually,and an average
annual rentper landownerof 260,000 pesos. As previouslyassumed,
foryearstherewas littleincentiveto createlarge-scalemanufacturing
industriesbecause lack of demand kept the marginal efficiency
of
capital too low.7 Now let this countryfollowa social pattern of
developmentsimilarto that ofNew Zealand or prairieCanada. Wages
mightrise to threequartersof the national income,and rentsfall to
one quarter. Specifically,
wageswouldrisefrom50 to 75 pesosweekly
or from2,600 to 3,900 annually;average rentalincomewould decline
from260,000 to 130,000pesos annually. With this reduced,though
still formidableincome, landlords mightfeel compelledto be economical. Labor would now be too expensiveto be hiredas butlers
and chauffeurswheneverthe value of these servicesdoes not reach
75 pesosweeklyperworker. In fact,theprerequisiteforany worker's
employmentmustnow be a marginalproductivity50 per centhigher
thanbefore. Meanwhile,in the courseofthe transition,the marginal
of capital would rise. As long as the income elasticityof
efficiency
demand for mass-producedgoods is greater among workersthan
landowners,the returnsfrominvestmentin mechanizedindustries
will rise. If the incomeelasticityof the workers'demand formassof bothcapital
produced goods is very high,the marginalefficiency
and labor in mechanized industrieswill rise a great deal. Other
thingsequal, it wouldrisemostrapidlyin the mostmechanizedindustries. Many servantswould driftinto factories. It mightpay to
has on others. See his "The EconomicFoundationsof Wage Policy,"Economic
Journal,LXV (Sept. 1955),389-404.
7. In sucheconomiessavingsare typicallyused to bid up the priceof real
abroadin realterms. Thissituationis partlythat"liquidityestatewhileflowing
preference
forland" whichKeynesbelievedmighthave had "the same effectin
innewlyproducedcapitalofwealthfromcurrent
investment
retarding
thegrowth
debtshave had in morerecenttimes."
assets,as highinterestrateson long-term
Op. cit.,p. 241.

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430

QUARTERLY JOURNAL OF ECONOMICS

equip the remainingservants with power mowers,mechanicalegg

beaters,and automaticfloorpolishers. In short,themoremechanized
an economyis to be, the moreit must be a highwage economy.8
In a somewhatdifferent
context,as Ricardo demonstrated,
a rise
in wages comparedwith profitsand interestwill lower the relative,
cost of goods whose productioninvolveslong turnoverperiods.9 In
otherwords,a lowerrate of returnto capital in the aggregatereduces
the cost of using capital equipment. A declinein profitsrelativeto
wages is, of course,entirelyconsistentwitha risein profitsrelativeto
amountsinvestedifnationalincomeis growing. The ratioof capital
to labor may risewhilethe ratioofprivatecapital to incomedeclines.'
Moreover,highwages will increasethe rewardsfromdeveloping
labor-savingtechniquesand stimulateresearchand innovation.Experiencewith capital equipmentwill fosterthe inclinationand ability
to innovate. Changesin one industrywillcreatethe need and opportunityfor changes in another industry. A large-scaleconsumers'
goods industrywill make a large-scale producers' goods industry
possible,and cheaper producers'goods will create the possibilityof
marketingnew typesofconsumers'goods or old typeson a new scale.
Since the absolute yield fromadditions to the capital stock, from
applied science,and fromorganizationalinnovationswill increase,a
8. The argument
mightbe pushedto disturbing
lengths. Even withperfect
equality,productionmightfailto reachmaximumproportions.Furtherredistributionmightincreasemechanizationby shiftingincomefromgroupswith
heterogeneous
tastesto thosewithstandardizedtastes,encouraging
conformity
at theexpenseofvarietyin decoration,
foods,entertainment,
etc. Moreover,any
countrywitha stereotyped
and easilyinfluenced
populationwouldbe morelikely
to growrichthana nationofindividualists.
No doubt considerations
like thesehave led some economiststo avoid all
explorationsof income distributionbecause value judgmentsare necessarily
involved. The logicoftheirpositionseemsless compelling
to theextentthatthe
possiblemonotonyof a machineage only replacesthe existingmonotonyof
squalor.
9. David Ricardo,On thePrinciplesofPoliticalEconomyand Taxation,ed.
Sraffa,p. 39.
1. A fallin profits
relativeto wagessignifies
a fallin the ratioofprofitsto
national incomeP/Y. But P/Y = P/K X K/Y, whereK/Y is the capital
coefficient
and P/K theprofit
rate. A declinein PlY in thefaceofa risein P/K
an evenfasterfallin K/Y. It maybe that,becauseofheavyemphasis
signifies
on social overheadcapital,a fallin K/Y is not typicalofeconomicdevelopment
in its earlystages. But in speakingofprofits,
we are referring
to ratiosinvolving
privatecapitalonly. The fallin the ratioof privatecapitalto nationalincome
may be morethanoffsetby therisingratioofpubliccapitalto nationalincome.
The risein theprofitrateis possibleas longas thepubliccapitalfailsto receive
itsproportionate
shareofthenationalincome. Meanwhile,in thiscase,theratio
of labor to nationalincomeis obviouslyfallingeven fasterthan the ratio of
privatecapitalto nationalincome.

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ECONOMIC GROWTH AND INCOME DISTRIBUTION

431

largervolume of resourcesis likelyto be allocated to the pursuitof

fundamentalscienceand to currentinvestment. In the terminology
of ProfessorsHarrod and Domar, both the "warranted" or "full
capacitygrowthrate" and the "natural" or "fullemploymentgrowth
rate" should increase.2 The productivityratio of capital will rise,
and the average and marginalpropensityto save will not fall sufficientlyto offsetthis rise,if indeed theydo not also rise.
There should be no need to remindourselvesthat duringthe
early stages of economicdevelopmenta directredistribution
of purchasingpowermay lead to increasedper capita consumptionat the
expense of desirable capital formation. Even in advanced societies
the channelingofworkersintothe productionofcapital goodsmay be
intimatelyassociated with institutionalarrangementsthat involve
an unequal distributionof income. In all such cases it would hardly
be wise to increase wages at the expense of a diminishedrate of
growth. We would thereforehave to restateour theoryin termsof
consumption
inequalityor the distributionofconsumption. Basically,
it is consumptioninequalitythat is likelyto channelworkersaway
from mass-productionindustriesinto luxury handicraftindustries
and personalservices.
if great incomeinequalityis associated with only
Furthermore,
moderateconsumptioninequality,its significancemay be primarily
Puritans could be
politicaland social. A group of wealth-investing
regarded as a distinguishedcaste of tax-collectors,charged with
maintenanceand growthof a community'scapital stock. The chief
reasonthe communitytoleratestheirhighincomesmay be the anticipation of higherconsumptionforall throughhigherproductivityfor
all. As long as the consumptionofthe wealth-investors
does not rise
fasterthan average consumption,the investorscannot be accused of
taking unfair advantage of their privileges,of divertingtaxes for
capital formationto theirownamusement.
It shouldbe noted,however,that in so faras thesehighincomes
2. R. F. Harrod, Towards a Dynamic Economics. See also, D. Hamberg,

"Full Capacityvs. Full Employment

Growth,"thisJournal,LXVI (Aug. 1952),
444-49; H. Pilvin,"Full Capacityvs. Full Employment
Growth,"thisJournal,
LXVII (Nov. 1953), 545-52,withcommentsby R. F. Harrodand E. Domar,
pp. 553-63. See also, W. W. Rostow, The Process of Economic Growth.

A detailedtheoryof economicgrowthin termsof incomedistribution

and
occupationalshiftsmightbe developedin termsofeconomicsectors,particularly
if the primarysectorwould includeonly agriculture,
the secondaryall highly
mechanizedindustries,and the tertiaryall occupationsin which relatively
unaided human skill limitsproductivity
increases. See Martin Wolfe,"The
ConceptofEconomicSectors,"thisJournal,LXIX (Aug. 1955),402-20.

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432

QUARTERLY JOURNAL OF ECONOMICS

are derivedfromownership,theymay in effectbe a tax on the use of

procapital equipmentand may thus discouragethe most efficient
ductive techniques. The more capital equipment is used in the
various stages of production,the higherwill interestand other propertychargesbe. Whennecessarycapital rationingis not the function
of such charges,theymightrendera roundaboutprocessmore costly
than efficient
resourceallocationwould otherwiserequire. Removal
ofthesechargeswouldtendto inducea shiftto productivetechniques
moreeconomicalof resources,and as Keynes once put it, this would
resultin "the productsof capital sellingat a price proportionedto
thelabor,etc.,embodiedin themon just thesame principlesas govern
into which capital-chargesenterin
the prices of consumption-goods
an insignificant
degree."' Thus, froma social point of view, it is
preferableforthe wealth-investors'(tax-collectors')high incomesto
be derived,say, fromhighprices(excisetaxes), or fromincometaxes,
with no directrelationto the amount of capital equipmentused in
production.
If, however,the prestigeof individual "tax-collectors"comes
fromthe amount of taxes collected (income earned), and not from
the numberof productiveplants established,in otherwords, if the
prestige-patterns
are somewhatlike those affectingwealth-holdersin
contemporaryWesterncivilization,then the ability to collect taxes
mustbe tied to the establishmentof productiveplants. Tying taxes
to the controland use of capital equipmentthroughthe institution
of propertyis therefore
the lesserevil in this context. It is the community'sway oftryingto make surethatthehighmoneyincomeswill,
in fact,be invested.
III
That industrializationrequiresgrowingincome or consumption
equality may be quite logical,even obvious; but empiricalevidence
forthe propositionis not easily produced. A clear picturecannot be
derived fromannual statisticsof income and expenditure. These
figuresmustbe adjusted forthe relativechangesin the pricesofmassproducedwage-goodscomparedwithpricesofluxuryhandicraftgoods
and personalservices. In the attemptwe inevitablyslide into a maze
ofindexnumberproblems.4Moreover,thelack ofadequate statistics
of any type, except for the most recentyears, for underdeveloped
3. Keynes, op. cit., p. 221.
4. See Joan Robinson, "Notes on the Economics of Technical Progress."
The Rate of Interestand OtherEssays (London: Macmillan and Co., 1952), p. 102.

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ECONOMIC GROWTH AND INCOME DISTRIBUTION

433

countriesmakes comparisonwith trends in industrializednations

difficult. This difficultyis reinforcedby the variety of natural
resourcecomplementsand by thefactthattrendsin capital formation
and technologicalprogressare not strictlyproportionalto each other
or to the (government-influenced)
trendsin consumptioninequality.
Nevertheless,such data as are available at least do not contradict our proposition. For the United Kingdom the incomeshare of
thetop 5 percentoffamilyunitshas declinedfrom46 percentin 1880
to 43 percentin 1910 or 1913,to 33 per centin 1929,to 31 per centin
1938, and to 24 per cent in 1947.6 In the United States the rate of
capital formationwas highestduringthe years 1884-1898when,due
to thelag in theseculardeclineofwagesbehindprices,incomeappears
to have been more evenly distributedthan at othertimes between
1869 and 1914. In theseyears the rate of capital formationreached
16.1-16.2 per cent of nationalincome. The rate of capital formation
remainedabove 13.0 per cent throughoutthe period 1869-1918,but
fell to 10.2 per cent forthe decade 1920-1929. During this decade
the incomesof the top 5 per cent of spendingunits increasedby 29
percent,whilethelower95 percentlost 4 percent. From 1929to the
years afterWorld War II (average of 1944, 1946, 1947, and 1950),
the share of nationalincomebeforedirecttaxes of thq top 5 per cent
fellfrom31 per cent to 20 per cent.6
Has therebeen any comparablenarrowingof incomeinequality
in countrieswhich have shown little economicgrowthsince 1850?
Data are not available. It is conceivablethatthe richmay oncehave
been richer,but it is hard to see how the poor could have survivedat
all with a standard of living lower than today's in Burma, Iran,
Ecuador, Kenya and many other countrieswhichhad a per capita
5. These figureswerecited by ProfessorSimon Kuznetsin his American
Economic AssociationPresidentialaddress, "Economic Growthand Income
Inequality,"printedin the AmericanEconomicReview,XLV (March 1955), 4.
Theirderivationwas notedas follows,"For 1938 and 1947,Dudley Seers,The
Levelling of Income Since 1938 (Oxford, 1951), p. 39; for 1929, Colin Clark,

NationalIncomeand Outlay(London,1937),Table 47, p. 109; for1880,1910,and

1913, A. Bowley, The Change in the Distributionof National Income, 1880-1913-

(Oxford,1920)."
6. Simon Kuznets, "EconomicGrowthand Income Inequality,"op. cit.,

p. 4; Shares of Upper Income Groups in Income and Savings (New York: National

Bureau of EconomicResearch,1953), Table 122, p. 220; NationalIncome,A

Summary
ofFindings(New York: NationalBureauofEconomicResearch,1946),
p. 53. SelmaGoldsmith
ofIncomeSincetheMidand others,"Size Distribution

Thirties," Reviewof Economics and Statistics,XXXVI (Feb. 1954), 1-32.

Percentagesare calculatedon thebasis of 1929dollarsforcapitalformation

and wouldbe slightlyloweron thebasis of currentdollars.

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QUARTERLY JOURNAL OF ECONOMICS

434

incomeofless than $100 in 1949. The tenthannual report(1955) of

the United Nations Food and AgriculturalOrganizationstates that
formanyunderdevelopedcountriesper capita foodconsumptionwas
lower in the 1950's than in the 1930's. It is possible that declining
death rates in the face of almost unchangedbirthrates,production
techniques,and capital stockshave loweredstandardsoflivingwithout changingthe degree of inequality. We do not know. We do
know that incomes in underdevelopedcountriestoday are more
unequally distributedthan incomesin the United States, Northern
Europe, and some British Dominions. The inverse correlation
betweenincomeinequalityand percapita incomein variouscountries,
shownin Table I, would ofcoursebe even strongerifallowanceswere
made forthe moreprogressiveincidenceof taxation,the distribution
benefits,and the relativelyhigherpricesofhandioffreegovernment
craftgoods in the wealthiercountries.
TABLE I
SHARES OF NATIONAL INCOME OF UPPER AND LOWER INCOME GROUPS
AND PER CAPITA INCOME IN SELECTED COUNTRIES
Country1

UnitedStates
(1944,1946,1947,1950)
UnitedKingdom
(1947)
Denmark'
(1948)
Italy
(1948)
Ceylon
(1950)
India
(1949-1950)
PuertoRico
(1948)

Share of Lowest
60 Per Cent
of Family
SpendingUnits
(%)

Per Capita
Income, Average
1948, 1949 in
U. S. Dollars

44

34

$1,489

45

36

775

45

32

735

49

31

230

50

30

73

55

28

57

56

24

275

Share of Top
20 Per Cent
of Family
SpendingUnits
(%)

Sources: United Nations, Statistical Office, National Income and Its Distribution in Under-

developedCountries,StatisticalPapers, Series E, No. 3 (New York: United Nations, 1951). Simon

Kuznets, "Economic Growthand Income Inequality," AmericanEconomicReview,XLV (March
1955), 20-21.

W. S. and E. S. Woytinsky, World Population and Production, Trends and Outlook

(New York: TwentiethCenturyFund, 1953), pp. 392-93.

l Dates apply to firsttwo columnsonly.
2 Distributionof individualincometax returns.

Since our model countryexploredthe effectsof incomedistribution in termsof ownershipand wages, it may be interestingto see
what the ratio of workers'compensationto ownershipincome is in

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ECONOMIC GROWTH AND INCOME DISTRIBUTION

435

various countries. The significanceof this ratio depends on the

assumptionthat ownershipincome is moreunequally distributed,a
point whichmay lead to semanticdifficulties.Only one of these is
that income receiptsof farmers,independentprofessionalworkers,
and owner-managers
of unincorporatedbusinessesare not uniformly
handled by statisticians. Moreover,the proportionof such income
in 1949 varied from12.4 per cent in the United Kingdomto 48.6 per
cent in Japan. Let us thereforeconfineourselvesto a numberof
countriesin whichthe portionof national incomereceivedby unincorporatedenterprisesvaried no more than 7 per cent from28 per
cent. If we comparethe eightcountrieswhichfellinto this category
and forwhichinformationalso happens to be available forthe late
1940's,it appears,as in Table II, that the higherthe ratioofemployees' compensationto profits,interest,rent,and royalties,the higher
the per capita incomeis likelyto be.
We must repeat again that these correlationsindicateonly that
TABLE II
COMPARISON
BY TYPES

OF PERCENTAGE

OF PAYMENT

Country

AND PER
A

DISTRIBUTION
CAPITA

INCOME
B

Compensation Profits,Interest,
of Employees2 Rents, Royalties
(%)
(%)

OF NATIONAL
IN SELECTED

Ratio of
A to B

INCOME
COUNTRIES

Per Capita
Income, 1948
U. S. Dollars

Finland

60.9

14.3

4.3

$569

Australia

54.0

16.9

3.2

812

Switzerland

59.4

19.4

3.1

950

Canada

58.8

19.7

3.0

895

New Zealand

54.3

18.4

3.0

933

Southern Rhodesia

48.9

22.0

2.2

105

Chile

46.0

26.1

1.8

180

Peru

42.2

24.1

1.7

82

(1948)
(1948)

(1949)

(1949)

(1948)
(1949)

(1948)
(1947)

Source: United Nations, Statistical Office, National and Per Capita Income8, Seventy Countrie8- 1949, Statistical Papers, Series E, No. 1 (New York: United Nations, 1950); National
Income and It8 Di8tribution in Underdeveloped Countrie8, Statistical Papers, Series E, No. 3 (New

York: United Nations, 1951). W. S. and E. S. Woytinsky,WorldPopulation and Production,

Trend and Outlook(New York: TwentiethCenturyFund, 1953), pp. 392-93.
1 Dates apply to firstthreecolumnsonly.
2 Covers all wages and salaries includingemployers'and employees'contributions
to social
insuranceand pensionfunds,paymentsin kind, and supplementssuch as commission,bonuses,
and tips.

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436

QUARTERLY JOURNAL OF ECONOMICS

in the courseofeconomicdevelopmenttherehas been a narrowingof

in income
income inequality. They do not prove that a difference
inequalitymay at timesbe the key factorthat accountsfordifferent
rates of growthor levels of efficiency.Convincingempiricalsupport
forsuch propositionsdepends on one's luck in findingsituationsin
whichall otherthingshappen to be equal. Two strikingcomparisons
that may come fairlyclose to this ideal involve (1) Argentinaand
and manufacturing.
Australiaand (2) Britishand Americanagriculture
Argentinaand Australia are both countriesin the temperate
latitudesof the southernhemispherethat have been settledby Europeans withinthe last threeor fourgenerations. Their climates(hot
summersand cool winters)are verysimilar;in fact,the variationsin
temperatureand rainfallof Sydney and Buenos Aires are almost
identical. Both Australiaand Argentinahave large arid hinterlands
of scrub woodland, but the Australiansection is partlyhotterand
drier. The principalproductsofbothareas are wheat,beef,and wool.
These are exportedto customersthousands of miles away. Other
products,oats, sugar cane, cotton,and fruitare generallyconsumed
at home. If desertsare excluded,Argentinais somewhatless densely
settled,and its chernozemsoil is superiorto Australiansoils.Australia
has a littlecoal and ironore,and Argentinaa littlepetroleum.
The principal differencebetween the areas is that the social
structureis highlyegalitarianin Australia and almost feudal in its
developed
inequalityin Argentina. Accordingto Pareto coefficients
exhibits
greater
the
income
distribution
of
Argentina
Colin
Clark,
by
inequalitythan that of manyunderdevelopedcountriesor of Europe
duringthe Middle Ages. On the otherhand, Australia,the country
that pioneeredwage boards and wage regulation,ranks just behind
New Zealand and Sweden in equality.7 In Australia the average
area perfarmwas 717.8 acres,and farmsweremechanizedand mostly
operatedby theirownersaround 1948. In Argentina70 per cent of
the land was in estates largerthan 3,000 acres, and twothirds was
farmedby tenants. In the principalsection,the Pampas, one-quarter
ofthe land was in estateslargerthan 75,000 acres (117 square miles),
owned by some fiftyfamilies. Good land was not forsale in small
amounts,and land sales were even too few to computeland values.
The landownersfordecades have been able to exact veryhigh rents
7. Colin Clark, The Conditions of Economic Progress, 2d ed., pp. 530-41.

indicatinggreatestequality,apply to contemporary
The highestcoefficients,
was found
Sweden(2.15), New Zealand (2.35), and Australia(2.12). Argentina
fortheUnitedStates
ofonly1.2-1.3. In 1945thecoefficient
to have a coefficient
was 1.75.
was estimatedto be 1.95. Britain'scoefficient

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437

ECONOMIC GROWTH AND INCOME DISTRIBUTION

fromtheirtenantswhose incomesconverselywere low even in years

ofhighprices. The reasonforthe highrentswas apparentlynot the
lack of alternativeestates to farm. As a matterof fact,70 per cent
ofthetenantsremainon the same estate less than ten years. According to ProfessorCarl C. Taylor,the social cohesionofthe landowners
has made substantialrentreduction,as well as risingfromtenantto
owner,nearlyimpossible.
The low incomesof a large portionof the populationand very
high incomes of a small minorityhave discouragedmechanization
and a shiftto mechanizedindustriesalong the line of development
followedin Australia. It is hardly surprisingthat per capita conTABLE III
COMPARISONS,
ARGENTINAANDAUSTRALIA
Argentina

Population(millions,1950)
AcresofArableLand perCapita (1950)

Acres of Wheat (thousands; average 1949, 1950)

Acres of Arable Land per Tractor (1951)
AgriculturalPopulation as Percentage
of Total Labor (1947)
Average Wheat Yield per Acre
(metricquintals; average 1949, 1950)

TextileConsumption
perCapita

(metricpounds, around 1948)

ElectricityConsumption per Capita
(kilowatthours,around 1948)

Total EnergyConsumption
perCapita
(coal and coal equivalentofoil,gas,fuelwood,

and waterpowerin metricpounds; around 1948)

Per Capita Income

(U. S. Dollars,1948)
Source:

17.2
4.1

Australia

8.2
3.4

12,441
4,732

11,965
247

36

16

4.3

4.3

17.8

21.3

255

1,160

1,780

5,440

315

812

W. S. and E. S. Woytinsky, World Population and Production, Trend8 and Outlook

(New York: TwentiethCenturyFund, 1953), pp. 48, 402, 462-63, 472-73, 516-17, 546-47. United

Nations, Statistical Office, National and Per Capita Income8, Seventy Countrie8 -

Papers, Series E, No. 1 (New York: United Nations, 1950), pp. 14-16.

1949, Statistical

sumptionof inanimateenergyin Argentinawas less than one-third

that of Australia. Per capita productivityin 1948-1949 was less
than half that of Australia, and the market per capita for manufacturedgoods, even those made of local raw materials,was often
smallerby an even greaterproportion. Duringthe 1930's an average
New Zealand urban employee,whoseincomeand taste approximated
thoseofhis Australiancounterpart,
spentabout 36 per centon things
otherthan food,rent,and clothing;whilea similarArgentineworker

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438

QUARTERLY JOURNAL OF ECONOMICS

spent only 16 per cent of his much smaller,incomein this way. In

1948 annual per capita incomeaveraged $812 in Australiaand $315
in Argentina.8
Differencesin physicalproductivitybetweenBritishand American agricultureand manufacturingalso illustratea direct effectof
social and incomeinequalityon efficiency.The Britishpopulationis
fairlyhomogeneous,at least to the extent that the social status of
Britishagriculturalworkersdoes not differ
widelyfromthat ofBritish
industrialworkers. A fair amount of social equality also characand settledagriculturalworkersin the Ameriterizesmanufacturing
can Middle West, but it does not apply to racial minorities,particularlyNegrotenantfarmersin theSouth and PuertoRican or Mexican
access
migrants. These minoritieshave low social statusand difficult
to manyoccupations. They overcrowda fewoccupations,command
low incomes,and can thereforebe employedunproductivelywithout
financialloss. They largelyaccount forthe fact that incomeshares
decreaseat a decreasingratefromthe firstthroughthefourthquintile
offamilyspendingunits(44, 22, 16,and 12 percent) and at an increasing rate fromthe fourthto the fifthquintile(12 and 6 per cent).9 In
theUnitedStates about 70 percentofNegroworkerswerein unskilled
occupationsof all types in 1940, comparedwith only 19 per cent of
Whiteworkers.'
If the average American workeris more productivethan the
average Britishworker,in what sectoris this productivitydifference
likelyto be highest? Certainlynot in that sectorwhichemploysthe
largestproportionof Negroesbecause herethe pressureto economize
on labor is weakest.
In 1940 33 per cent of AmericanNegro workerswere concentrated in agriculture,compared with only 19 per cent of White
workers. The low productivityof these Negroes and of migrant
foreignlabor elsewherebrought the average productivityper manhour in Americanagriculturedown to such an extent that in the
8. See: PrestonJames,Latin America(New York: OdysseyPress, 1950),
pp. 259-339. Carl C. Taylor,RuralLifein Argentina
(Baton Rouge: Louisiana
State University
Press,1948), pp. 192-206. UnitedNations,StatisticalOffice,

National and Per Capita Incomes, SeventyCountries-

1949, Statistical Papers,

SeriesE, No. 1 (New York: UnitedNations,1950),pp. 14-16. W. S. and E. S.

Woytinsky, World Population and Production, Trends and Outlook (New York:

TwentiethCenturyFund, 1953),pp. 48, 392-402,472-547.

9. Simon Kuznets,"Economic Growthand Income Inequality,"op. cit.,
pp. 4-22.

1. U. S. Bureau of the Census, SixteenthCensus Reports,ComparativeOccupation Statisticsfor the United States, 1870-1940, p. 189.

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ECONOMIC GROWTH AND INCOME DISTRIBUTION

439

was only 1.03 timesas greatper

middlethirtiesphysicalproductivity
workeras in British agriculture. The relativelyhigh incomes of
farmersand farmlabor in the Dakotas, whichwere due to greater
were offsetby
mechanizationin the face of lower per acre fertility,
the low incomes in the South. Physical productivityin American
which employed a low proportionof Negroes and
manufacturing,
thereforehad to economizeon high-wagelabor throughmechanization,was 2.15 timesas greatas in Britishmanufacturing.2

IV
We have attempted to show the importance of social homogeneityand resultingpatternsofincomeequalityas factorsconducive
to high productivityand the use of capital equipment. The introduction of advanced machinerythroughoutan economyis, in part,
a functionofthe volume of saving,the available technology,and the
ratio of labor to natural resources. But patternsof ownershipand
income distributionalso affectthe introductionof machineryby
the proportionof the labor forceemployedin indus(1) determining
tries capable of intensive mechanizationand (2) influencingthe
marginal efficiencyof capital in mass-production(that is mnassmarket)industries. A low degreeof incomeinequalityin a largeand
prosperouseconomymay have no serious effecton growth. Such
inequalitymay largelyreflectthe changeableconditionsofsupplyand
2. L. Rostas, ComparativeProductivityin British and American Industry

(Cambridge:National Instituteof Economicand Social Research,Occasional

Press,1948),pp. 89-91.
Paper XIII, CambridgeUniversity
of
It shouldbe notedthatwe are not comparingthe relativeproductivity
of (1) U. S.
but only the relativeproductivity
and agriculture
manufacturing
with
workers
and (2) U. S. agricultural
withU. K. manufacturing
manufacturing
in manufacturing
workers.The greatdifference
U. K. agricultural
productivity
wasno doubtpartlyorlargelydueto a greaterabundanceoffueland rawmaterials
possiblethattheAmericanadvantagein
in theUnitedStates. It is nevertheless
was evengreater.
agriculture
of certainproductiveprocThe extentof the marketand theindivisibility
do not appear to be the chieffactorsaccountingforthe
esses,whileimportant,
in Americanmanufacturing,
Productivity
in manufacturing.
greaterdifferential
observerswas alreadyhigherin 1870
accordingto Rothbarthand contemporary
whenthe marketforAmericangoods was muchsmallerthan the marketfor
Britishgoods. Moreover,as Rostas found,betweenrelativesizesof marketand
relative productivity" . . . there does not appear to be a close relationship .

. in

is thesame or smallerthan
wherethesize oftheindustry
a numberofindustries
in theU. S."
wool) thereis an advancein productivity
in Britain(e.g.,breweries,
ofU. S. A.
(ibid.,p. 59). See also, E. Rothbarth,"Causes ofSuperiorEfficiency
IndustryComparedwithBritishIndustry,"EconomicJournal,LVI (Sept. 1946),
383-90.

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440

QUARTERLY JOURNAL OF ECONOMICS

demand for various skills. But when income inequality derives,

directlyor indirectly,from permanentdifferencesin caste, race,
ownership,and the like,and if consumptioninequalityis the result,
industries
of capital in mass-production
thenthe marginalefficiency
will be lowerthan otherwiseand the introductionof machinerywill
be retarded. More assets may be held liquid or investedabroad, and
the proportionof the labor forceemployedas retainers,menialservants, and luxury handicraftworkerswill be high. In somewhat
archaic terms,whenconsumptioninequalityis great,workerscan be
employedin occupationsin whichtheirmarginalutilityis low because
themarginalutilityofthe smallamountofmoneypaid to themis also
low and because theirmarginalproductivityin all otheroccupations
is, and will remain,equally low.
W. PAUL STRASSMANN
UNIVERSITY OF MARYLAND

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