An optimist for our time.

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Falling Inequality Defies Piketty's Dark Vision

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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If my great-great-grandparents hadn’t changed the family name at Ellis Island back in 1901, I would be a Kuznets instead of a Smith. Either way, I suppose I was destined to bear the name of an economic optimist. Adam Smith, of course, everyone knows about -- he advanced the thesis that commerce and free trade lead to a wealthier society. But far fewer people have heard of Simon Kuznets. A Belarusian immigrant economist who eventually won a Nobel, Kuznets helped create the notion of gross domestic product, which measures a society’s overall wealth. But Kuznets was concerned with more than just GDP -- he recognized that inequality was a bad thing for society, and that the only good economy was one where a rising tide lifted all boats. 

Kuznets hypothesized that as a society gets rich, inequality first goes up, and then falls. The rationale was simple: in the early stages of industrialization, a flood of workers migrating from farms to cities holds down wages and enriches the owners of land and factories. But when the flood of cheap labor is over, wages will rise and inequality will fall. This hump-shaped pattern was dubbed the Kuznets Curve. It seemed to fit the experience of the rich Western nations, which had seen inequality soar in the Gilded Age, but then plummet after the World Wars. 

QuickTake Income Inequality

Nowadays, people are starting to question the sunny optimism of the Kuznets Curve. Inequality has risen in rich countries as globalization has progressed. People are beginning to turn to the darker prophecies of Thomas Piketty, who claims that inequality will naturally widen until a catastrophe (like the World Wars) strikes. 

But I believe the doomsayers are jumping the gun. If you think of countries as being self-sufficient, isolated units -- as people did in the era of Kuznets -- then you have to be worried. But if you think of the worldwide economy as one integrated unit -- as might be more appropriate in a globalized age -- then you should be encouraged by what the data show. 

Tomas Hellbrandt of the Bank of England and Paolo Mauro of the International Monetary Fund show in a new working paper that global inequality is falling, as poor countries power ahead. The global Gini coefficient -- a standard measure of income inequality -- is falling fast. In 2003 the coefficient was 69 (with 0 being perfect equality and 100 being perfect inequality). In 2013 it was down to 65. If current trends continue, it is on course to reach 61 by 2035. 

In this case, a picture may be worth a thousand words. Hellbrandt and Mauro show how the global income distribution has evolved during the past decade:

What we see here is that the whole distribution is both flattening out and shifting to the right. The flattening means that the world is getting more equal, fast. That green peak on the left represents the huge number of people who were desperately poor in 2003. That peak of absolute poverty has collapsed. Meanwhile, the shift to the right means that the whole world is getting richer -- the rich countries have grown their economies too, just not as fast as the poor countries. 

So around the world, a rising tide is lifting all boats, and it’s lifting the boats at the bottom faster than the boats at the top. This is really an extremely good, successful outcome (though it would have been nice to see this happen without the increase in inequality within some countries). 

It’s important to realize is that this is a recent phenomenon. For a long time, the opposite was happening. In 1988, for example, economic historian Brad DeLong showed that the poor countries of the world had mostly failed to catch up to the rich countries since 1870. The former colonial powers of Western Europe, the U.S. and Japan were zooming ahead, with the former colonies either being left in the dust or struggling just to keep pace. 

So we may be seeing something like a global Kuznets Curve. In the early stages of global growth, rich countries -- and the rich people in them -- zoom ahead of the pack, but eventually the masses catch up. If the forces that move inequality really are global in nature, then it means that capitalism and trade really are a force for good. It means that we don’t really face a tradeoff between wealth and inequality in the long run. And it implies that once the poor countries have done some more catching up, inequality will begin to fall within countries, too. 

The new data, and the global Kuznets narrative, also destroy the idea that the wealth of rich countries is based on the exploitation of poor countries. Capitalism is not colonialism after all. Most of our global wealth is created by trade and industriousness, not plundered or extracted by force. The world isn't a zero-sum game. 

For now, the economic optimists are still winning. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net