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Modern Economic Growth: Rate, Structure and Spread

Author(s):Kuznets, Simon
Reviewer(s):Easterlin, Richard A.

Project 2001: Significant Works in Economic History

Simon Kuznets, Modern Economic Growth: Rate, Structure and Spread. New Haven and London: Yale University Press, 1966. xvii + 529 pp.

Review Essay by Richard A. Easterlin, Department of Economics, University of Southern California.

A Vision Become Reality

Modern Economic Growth: Rate, Structure, and Spread is the fulfillment of a vision that redefined the study of economic growth. With the emergence after World War II of the newly independent nations of the Third World, the problem of promoting economic growth came to the fore. Economic historians responded to this challenge by advocating industrialization, basing their arguments on the historical experience of the handful of countries that accounted for the bulk of their research — the United Kingdom, United States, Germany, France, Russia and Japan. Economists characteristically turned to theory, arguing the need for higher savings rates, as demonstrated by the Harrod-Domar re-model of short term Keynesian theory. Some social scientists, impressed by the cultural disparities between East and West, questioned whether Third World economic development was even a realistic possibility.

Genesis

It was in this context that in 1948 Simon Kuznets developed a proposal for the comparative study of the economic growth of nations (Kuznets 1949). This proposal was first presented to the National Bureau of Economic Research (NBER) as a new initiative in its empirical studies, but was turned down by Arthur F. Burns on the grounds that it would divert the Bureau from its primary focus on the United States. Fortunately the private nonprofit Social Science Research Council (SSRC) was more farseeing, and responded by establishing a Committee on Economic Growth, with Kuznets as chairman. This committee succeeded in getting substantial funding from the Ford Foundation, and over the next two decades was the most active committee of the SSRC.

Although comparative study had been advocated as early as the mid-nineteenth century by the German Historical School (Ashley 1900), with whose work Kuznets was familiar, it had gone nowhere, largely because of failure to establish a systematic method of study. What was distinctive in Kuznets’ vision was the idea that a quantitative framework derived chiefly from the national income accounts would provide the foundation for comparative study. Kuznets thus built on his two decades of pioneering NBER work on the measurement of national income to supply the basic analytical structure missing from the approach of the German Historical School.

Organization

Prior to World War II empirical research on economic development had been fragmentary, the best known being that of Colin Clark (1940), whose results stressed the primary-secondary-tertiary shift in industrial structure accompanying economic growth. Kuznets’ experience in developing alternative approaches to the measurement of national income — by type of product, industry, factor share, and size of income — and his study of demographers’ work on population and labor force and their components of change led to a much more comprehensive undertaking. The basic organization of Kuznets’ Modern Economic Growth parallels the theoretical structuring of economic study in Alfred Marshall’s Principles of Economics and harkens back to John Stuart Mill’s Principles of Political Economy — production, allocation of resources, income distribution, consumption, and external relations. This can be appreciated from scrutinizing the succession of tables in the book (pp. xiii-xvii), which, in Kuznets’ writing, were always the skeleton on which the rest of the book was hung. Kuznets’ study of economic growth thus reflects the disciplinary categories of economics, and contrasts with the standard organization of economic history texts even to the present time, which typically shortchange topics such as consumption, income distribution, and population. Chapter 2 focuses on population, total and per capita output, inputs of labor and capital, and the output-input relationship; chapter 3 on the allocation of resources by both broad industrial sector and detailed industry; chapter 4 on the distribution of income by factor shares and size; chapter 5 on consumption or, more generally, national product by end use; and chapter 6 on external relations — the flows among countries of knowledge, goods, persons, and capital. In these chapters Kuznets generalizes about the rate and structure of economic growth from the available time series data on national income, labor force, and population for up to eighteen developed countries. Many of the long-term national income estimates for countries other than the United States were made by scholars who were working under Kuznets’ guidance and were often funded in part by the Ford Foundation via the SSRC Committee on Economic Growth.

The last two chapters of Modern Economic Growth bring in the less developed countries. At the time that Kuznets wrote there were few time series available for these countries, so the focus is chiefly on differences between more and less developed nations in (to the extent data permitted) production, resource allocation, consumption, and external relations. There is also some arithmetical conjecture about the historical spread of economic growth and its implications for international differences in living levels. Throughout the volume the data analysis is interspersed with theoretical speculation, but the primary emphasis is on quantitative findings about the nature of economic growth. In this, Kuznets’ work is a league apart from the sweeping theoretical generalizations of his contemporaries in economics, and is squarely in the empirical tradition of his teacher and mentor, Wesley C. Mitchell.

Findings

Among the most important findings brought out by the book is the substantial degree of uniformity in the nature of modern economic growth in countries varying as widely in institutional structure and culture as the United Kingdom, USSR, and Japan. Contrary to those who stress the importance — positive or negative — of indigenous conditions, Kuznets presents evidence of the unusually high rates of output growth and similar shifts in resource allocation common to all countries undergoing economic development. While some economic historians stress the continuity of history and question the notion of revolutionary change, Kuznets sees modern economic growth as a new economic epoch, pointing to the unprecedented high rates of growth and shifts in resource allocation as evidence. The paramount feature distinguishing this epoch is the application of scientific knowledge to problems of economic production and the development of a science-based technology. Kuznets also recognizes the existence of variability among countries and the importance of knowing about the history and culture of each. But his data for the first time demonstrate conclusively what has now come to be widely accepted — that in its broad contours the economic system of all countries undergoing modern economic growth changes in a dramatic and quite similar way.

This similarity he took to derive largely from the replacement of premodern by modern technology across the broad industrial spectrum of the commodity-producing economy — agriculture, industry, transportation, and distribution. His work made clear the high pre-World War I growth rates in Australia, New Zealand, Canada, and Denmark, based on modernization of agriculture, food processing, transportation, and distribution, and severely undercut economic historians’ stress on the necessity of industrialization in the British mold. The tension in the discipline’s thinking created by Kuznets’ results is demonstrated by the first chapter in the 1965 Cambridge Economic History’s Industrial Revolutions and After. While this chapter presents data demonstrating the remarkable pre-World War I productivity growth in the countries just mentioned, they are dismissed as still having (contrary to the evidence) “pre-industrial levels of economic organization,” or their experience is termed “paradoxical.” Only in time would economic historians recognize that modern economic growth need not be in the British image. While Kuznets stressed uniformity in the development experience due to the application of modern technology to the economy generally, his findings demonstrated that economic growth did not necessarily require industrialization in the British heavy-industry style.

A major thrust of Modern Economic Growth is that massive structural changes in the economy and society are a necessary and integral part of the process of economic growth. This is because the economy-wide adoption of modern technology, in the context of similarly-structured human wants in all societies, engenders common patterns of change. These encompass the shift from agriculture to industry and services, a replacement in many industries of small-scale by large-scale productive units, and related shifts from personal enterprise to impersonal organization of economic firms, and from blue-collar to white-collar occupations. Associated with these changes is a redistribution of the primary locus of economic activity from countryside to city, and thus in the geographic distribution of the population. Such changes, Kuznets emphasizes, all require an uprooting of the population — internal migration and occupational mobility at a rate never before witnessed. Economies undergoing rapid economic growth also experience disproportionate expansion of international trade, and throughout the world — developed and less developed alike — economic interdependence grows greatly.

The effect of rapid aggregate growth and massive structural change may be disruptive internally and internationally, a point that Kuznets stressed particularly in his 1971 Nobel Memorial Lecture (Kuznets 1973), which can profitably be read in conjunction with Modern Economic Growth. The income shares of farmers, landowners, and small-scale producers are adversely affected by the structural shifts. Manual work, and especially unskilled labor, is increasingly replaced by office work, and a middle class society of employees — white-collar workers and upper level blue-collar workers — comes to the fore. These changes undermine the pre-existing political structure of a country and necessitate adaptation to the new economic realities imposed by modern economic growth. Kuznets puts it more forcefully: “In that modern economic growth has to contend with the resolution of incipient conflicts continuously generated by rapid changes in economic and social structure, it may be described as a process of controlled revolution” (p. 252).

Similarly, on the international scene, rapid economic growth upsets the world balance of political power, especially as populous countries undergoing modern economic growth acquire new and disproportionate military strength commensurate with their differential productivity growth. The result is an increased tendency toward imperialism, as well as conflict within the developed bloc, as new challengers to early leaders emerge.

Method

Many of the data and findings in Modern Economic Growth — and sometimes more — appeared in a succession of articles on the individual chapter topics between 1956 and 1967 in the journal Economic Development and Cultural Change (Kuznets 1956-67). What was new in Modern Economic Growth was that it assembled the results on the varied topics in one place, and thus provided a concise and comprehensive overview of the nature of long-term modern economic growth as revealed by empirical study. It is noteworthy that in Modern Economic Growth Kuznets relies for his generalizations on historical time series, whereas his papers in Economic Development and Cultural Change included current international cross sectional data as well as time series. In this, Kuznets’ methodology in Modern Economic Growth contrasts with the practice — frequent in his day and even more common now — of inferring historical trends from cross sectional data. In Modern Economic Growth Kuznets makes quite explicit his reservations about using cross sectional data to infer historical trends (pp. 433-437). Put simply it is that at a point in time technology, institutions, and tastes are fixed. But the essence of economic growth is that trends over time are dominated by changes in technology, institutions, and tastes, and these changes are captured poorly, if at all, in cross sectional data.

By the time Modern Economic Growth was published, so many of the empirical studies of Kuznets and his collaborators had already permeated the field that reviewers tended to overlook the landmark importance of the book, and objected that it was short on theory (see for example Blitz [1968] and Williamson [1968]). Admittedly, Kuznets is reserved in his use of economic theory and skeptical of formal mathematical and econometric models. This stems, not from a rejection of theory, but from his concern about the historical relativity of prevailing economic theory. To Kuznets, “much economic writing and theorizing . . . [is] geared to the current conditions and oversimplified to the point of yielding a determinate answer. . . . Such theories . . . tend to claim validity far beyond the limits that would be revealed by an empirical test” (Kuznets 1955, p. 76). Kuznets’ limited reliance on economic theory stems too from what he feels is its limited coverage of social reality. Particularly in the study of economic growth did he feel that an expansion of disciplinary boundaries was necessary. “Much as one may regret leaving the shelters of the accustomed discipline, it does seem as if an economic theory of economic growth is an impossibility, if by ‘economic’ we mean staying within the limits set by the tools of the economic discipline proper” (Kuznets, 1955, p. 73). He would no doubt welcome the interest today in developing theories of economic growth that incorporate institutional change, science and technology, and economic-political interactions.

Conclusion

An enormous and ever-expanding quantitative data base now exists for the study of modern economic growth. The World Bank currently makes available a data archive for over two hundred countries since 1960 embracing a wide variety of economic and social indicators (World Bank, 2001). Working explicitly in Kuznets’ tradition, Angus Maddison (1995) has pieced together from the ever-growing data base time series on national product going back one to two centuries for 56 developed and less developed nations. Robert Summers and Alan Heston (1991) following the lead of Kuznets’ student, Irving B. Kravis, have developed data since 1950 for 152 countries on national product and its components carefully adjusted for international differences in purchasing power. Economic historians have compiled a variety of time series statistics for countries in Europe, Asia, and Latin America (e.g., Mitchell 1975). To a large extent this immense body of data represents the fulfillment of Kuznets’ vision of a quantitative framework for the systematic study of economic growth. For most scholars in the field today — economic historians and economic theorists alike — these data both define the object of study and provide the testing ground for theory. Thus has the study of economic growth been redirected much as Kuznets advocated — a vision become reality.

Writing of Schumpeter, Kuznets once observed that “strong minds are guided by their own interests,” a statement that applied equally to him. In the discipline of economics where deductive analysis is the hallmark of accomplishment, Kuznets, though himself a creative and original thinker, was notable for his insistence on facts and measurement. In a field that prides itself as “queen of the social sciences,” Kuznets reached out to other disciplines both in teaching and research. And in a subject where sweeping ideological prescriptions for reform abound, Kuznets was both in words and example a passionate believer in the ultimate value of science. In 1971 Kuznets received 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.”

References:

Ashley, W.J., 1900. “Roscher’s Programme of 1843″ in W.J. Ashley, Surveys: Historic and Economic. London: Longmans, Green, pp. 31-37.

Blitz, Rudolph C., 1968. “Review of Simon Kuznets’ Modern Economic Growth: Rate, Structure and Spread,” Journal of Economic History, 38, no.1 (March), pp. 140-142.

Clark, Colin, 1940. Conditions of Economic Progress. London: Macmillan.

Kuznets, Simon, 1949. “Suggestions for an Inquiry into the Economic Growth of Nations,” and “Notes on the Quantitative Approach to Economic Growth” in Universities-National Bureau Committee on Economic Research, Problems in the Study of Economic Growth. New York National Bureau of Economic Research, pp. 3-20, 117-172.

Kuznets, Simon, 1955. “Toward a Theory of Economic Growth,” in Robert Lekachman, National Policy for Economic Welfare at Home and Abroad. Garden City, NY: Doubleday.

Kuznets, Simon, 1956-1967. “Quantitative Aspects of the Economic Growth of Nations,” ten long papers published either in, or as supplements to, Economic Development and Cultural Change.

Kuznets, Simon, 1973. “Modern Economic Growth: Findings and Reflections,” Nobel Memorial Lecture, December 11, 1971, American Economic Review, 63, no. 3 (June), pp. 247-58.

Maddison, Angus, 1995. Monitoring the World Economy, 1820-1992. Paris: Organization for Economic Cooperation and Development.

Mitchell, B.R., 1975. European Historical Statistics 1750-1970. New York: Columbia University Press.

Summers, Robert and Alan Heston, 1991. “The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988,” Quarterly Journal of Economics 106, no. 2 (May), pp. 327-68. On the web at http://pwt.econ.upenn.edu.

Williamson, Jeffrey G., 1968. “Review of Simon Kuznets’ Modern Economic Growth: Rate, Structure, and Spread,” Economic Development and Cultural Change, 16, no. 3 (April), pp. 470-474.

World Bank, 2001. World Development Indicators. Washington: World Bank. On the web at http://www.worldbank.org/data.

Richard A. Easterlin is the former president of both the Economic History Association and the Population Association of America. He is author of Growth Triumphant: The Twenty-First Century in Historical Perspective and Birth and Fortune: The Impact of Numbers on Personal Welfare.

Subject(s):Economic Development, Growth, and Aggregate Productivity
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII