- Person
- Simon Kuznets
- Lived
- 1901–1985
- Field
- Economics
- From
- Russian-born American
The story
In 1936 John Maynard Keynes published the theory that reshaped economics. One of its building blocks, later called the absolute income hypothesis, linked what people spend directly to their current income, and it gave rise to the first formal consumption function. It implied that as a nation grows richer, people will save a larger share of their income.
Simon Kuznets was in a unique position to test the idea. Since 1931 he had led the National Bureau of Economic Research's work on US national income and had assembled decades of figures on income, consumption and savings. He had also studied the long-term relationship between output and income, consumption and saving, and the share of income that went into new capital.
In his 1942 study Uses of National Income in Peace and War, published by the National Bureau, Kuznets became the first economist to use long time-series data to show that this prediction broke down in the long run. The Keynesian relationship seemed to hold in short-run snapshots that compared households at a single moment. Over the longer span from the 1870s to the 1940s, however, his figures showed that the share of income Americans saved stayed roughly constant, despite large increases in income.
The finding surprised economists and posed a puzzle that needed a new explanation. Kuznets's patterns of savings and income behaviour paved the way for Milton Friedman's permanent income hypothesis and Franco Modigliani's life-cycle hypothesis, which argue that people base their spending on expected long-term income and plan their saving over a lifetime. They also stimulated other alternatives, such as the relative income hypothesis.
The episode showed Kuznets's method at its best: an influential theory was tested against carefully built data, and the data won. Modern models of how households save and spend, which central banks and governments use when they judge the effects of tax changes or stimulus payments, descend from the debate his numbers started.
Why it matters
Kuznets's careful use of data led to better theories of household saving that still guide economic policy.
About Simon Kuznets
Pinsk-born economist who built the first official estimates of US national income, laying the foundations of GDP, and won the 1971 Nobel Prize for his empirical study of economic growth.
More about Simon Kuznets
- Simon Kuznets proposed the famous Kuznets curveIn 1955 Simon Kuznets proposed that as countries develop, income inequality first rises and then falls, an idea known as the Kuznets curve.
- Simon Kuznets discovered the 15–25 year economic swingsStudying US data back to 1865, Simon Kuznets identified economic cycles lasting 15 to 25 years, now known as Kuznets cycles or long swings.
- Simon Kuznets produced the first US national income figuresIn 1934 Simon Kuznets delivered the first official estimate of US national income, laying the groundwork for the measure we now call GDP.
- Simon Kuznets launched the study of how nations growSimon Kuznets compiled 60 years of data for 14 countries to explain modern economic growth, helping to found the field of development economics.
- Simon Kuznets warned that GDP does not measure welfareSimon Kuznets helped standardise the measurement of national output, but cautioned that a nation's welfare can scarcely be inferred from a measure of national income.
- Simon Kuznets helped nations build economic statisticsAfter World War II, Simon Kuznets advised the governments of China, Japan, India, Korea, Taiwan and Israel on setting up their national systems of economic information.
Sources
- Simon Kuznets Wikipedia
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.