55.-Economic Growth and Income Distribution

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
I. Introduction, 425. - II. Economic growth and growing income equality,

427. - III. Empirical evidence, 432.- IV. Conclusion, 439.
According to a straw man version of static price theory and wel-

fare economics, wages will inevitably be at an optimum level under
market conditions of perfect competition. Due to the free interplay
of supply and demand, prices of all productive factors and marginal
productivities will have come to rest at a level corresponding to maxi-
mum economic efficiency. Government action contributes to effi-
ciency only by providing social overhead capital - highways, sani-
tation, education, order - and by preventing industrial water pollu-
tion and other social losses. Particularly government interference
with pricing itself would mean dislocation and impaired efficiency.
Hence minimum wage legislation would adjust inequity only at some
increase in economic waste. An unequal distribution of property
income may be morally inequitable, but is conceived to have little
bearing on technical efficiency.'
These conclusions are usually based on one or more of the follow-
ing assumptions: perfect divisibility of products and factors, increas-
ing or constant real costs, income-inelastic demand, a given state of
technology, and the impossibility of making interpersonal utility
comparisons. Professor Harry G. Johnson has added the assump-
tions that all prices and interest rates remain constant, that changes
in the asset holdings of individuals and the repercussions on the
* Professors Dudley Dillard, Daniel Hamberg, and Allan Gruchy of the

University of Maryland have read an earlier draft of this article, and their
suggestions are acknowledged with thanks.
1. See, for example, Tibor Scitovsky, Welfare and Competition, pp. 55, 60,
179; or Denstone Berry, "Modern Welfare Analysis and the Forms of Income
Redistribution," in Income Redistribution and Social Policy, ed. Alan T. Peacock
(London: Jonathan Cape, 1954), p. 51. But see also Tibor Scitovsky, "Two Con-
cepts of External Economies," Journal of Political Economy, LXII (April 1954),
143-51; J. A. Stockfish, "External Economies, Investment, and Foresight," and
Tibor Scitovsky, "A Reply," Journal of Political Economy, LXIII (Oct. 1955),
446-51.
425
426 QUARTERLY JOURNAL OF ECONOMICS
volume of investment can be ignored, and that all goods and services
are produced by one homogeneous industry.2
If these assumptions are relaxed, however, the elasticity of sub-
stitution of capital for labor, the relative income elasticities of demand
for wage goods and "quality" goods, and, above all, the possibilities
for exploiting increasing returns become highly important in deter-
mining the ultimate effects of measures redistributing income. It is
the purpose of this paper to show that when the discussion is placed
against the background of a growing, fully employed economy, a
direct correlation between income inequality and productivity
becomes apparent:
1. Given the annual volume of saving and investment in a
competitive economy, the less income inequality is required to dis-
tribute factors of production among various industries, the more
efficiently will resources be converted into goods and services.
2. A redistribution of income can raise the marginal efficiency
of capital and increase the volume of saving and investment by induc-
ing a shift to mass-production industries and by stimulating tech-
nological progress.
This inverse correlation between economic growth and income
inequality is implicit in Professor Nurkse's doctrine of "balanced
growth" through simultaneous investment over a range of comple-
mentary industries. Nurkse believed that such investment would
enlarge the aggregate size of the market and investment incentives
all around because, "People working with more and better tools in a
number of complementary projects become each other's customers."3
Obviously if the bulk of the output of the complementary industries
is to be consumed by workers in these industries, the workers must
also receive the bulk of the new purchasing power. Nurkse, however,
confined himself to underdeveloped economies. We shall analyze his
case and try to show that differences in income equality also affect
the growth of developed countries.
The idea that reduced income inequality may accelerate growth
by maintaining full employment does not concern us here. This was
2. Harry G. Johnson, "The Macro-economics of Income Redistribution,"

Income Redistribution and Social Policy, op. cit., p. 20.
3. Ragnar Nurkse, "Some International Aspects of the Problem of Economic
Development," American Economic Review, XLII (May 1952), 572. See also his
Problems of Capital Formation in Underdeveloped Countries (New York: Oxford
University Press, 1953). Also P. N. Rosenstein-Rodan, "Problems of Indus-
trialization of Eastern and South Eastern Europe," Economic Journal, LIII
(June-Sept. 1943).
ECONOMIC GROWTH AND INCOME DISTRIBUTION 427
the problem of Keynes and Hobson, who considered income inequality

a cause of underconsumption, or oversaving, and therefore a cause
of depression in the short run and diminished growth in the long run.4
They were concerned with the distribution of income because it affects
the aggregate rate of consumption. We, on the other hand, are con-
cerned with the distribution of income because it affects the distribu-
tion of consumption. Our conclusions can therefore be consistent
with unchanged or with decreased rates of consumption.
II
It is our contention that, given a sufficiently large population,

economic growth depends not only on capital formation and tech-
nological progress, but also on growing income equality, which we
shall later redefine as consumption equality.
We may illustrate the relationship between income distribution
and productivity by an economy in which a homogeneous labor supply
is largely employed in agriculture and in which a small group of land-
owners receives half the national income. Some products are exported,
and these exports enable the landowners to invest all their savings
abroad. Let us say these savings amount to 5 per cent of the national
income and that the landowners have been in the habit of spending
abroad all the returns on their foreign investments. The population
is stable, inventions and innovations do not occur, and year after
year, except for the international account, the national income
remains the same.
Finally, however, the landowners decide to import superior
agricultural tools. Productivity doubles, and half the farm workers
become available for other purposes. That portion of half the crop
that, in effect, was once received by the released workers may now
partly accrue to those farm workers who remain employed; but it is
not unreasonable to suppose that most will go to the landowners.
After all, their investment made the release of labor possible. Since
it is improbable that the landowners can personally consume an
increased share of the crop, they must re-employ the released workers
if they are to have a return on their investment. They may even
provide the workers with training and further capital equipment
4. H. A. Hobson, The Evolution of Modern Capitalism, rev. ed., pp. 377 ff.,
and The Industrial System, an Inquiry into Earned and Unearned Income, pp. 333 ff.,
Keynes, General Theory, p. 373. Kenneth K. Kurihara, "Distribution, Employ-
ment, and Secular Growth," Post-Keynesian Economics, ed. Kenneth K. Kurihara,
(New Brunswick: Rutgers University Press, 1954), pp. 251-73.
from abroad. Let us assume the export industries cann

Can the released workers be employed in new mass-production, mass-
market domestic industries, balanced-growth fashion?
By definition, any investment which alters the national distribu-
tion of income in favor of the landowners must reduce the portion of
the labor force working for itself or decrease the relative efficiency of
that portion. Regardless of whether wage-goods or quality-goods
production is made more efficient, the productive capacity of the
quality-goods sector must increase faster. With all but rapidly
diminishing income inequality, every new machine must create as a
by-product a greater supply of gardeners, footmen, and luxury crafts-
men, satisfying ever more marginal landowner wants with ever
decreasing productivity. The exploitation of increasing returns in
some occupations would therefore be partly offset by the transfer of
workers to other occupations with sharply decreasing returns. The
primary assumption involved is that the landowners' propensity to
consume the services of chauffeurs, craftsmen, etc., is greater than
that of workers. To the extent that craftsmen are employed only
because the volume of demand is too small, the effect of inequality on
efficiency will vary inversely with the size of a population or market.
Other things being the same, inequality would therefore be more
significant in Iceland than in the United States. Luxury cars are
mass-produced in America, but it is significant that today "automa-
tion" pays in the manufacture of Ford V-8 but not Lincoln engines.5
Production can, of course, increase regardless of a growing
inequality of incomes. But it may increase less than the possible
maximum. If a different pattern of income distribution can shift
some workers into more efficient, particularly decreasing cost indus-
tries, that is, if the portion of the labor force working in industries
capable of intensive mechanization can be increased, then income
redistribution can accelerate economic growth.6 In our model, all
5. The New York Times, Dec. 18, 1955, sec. 6, p. 9.
6. Before the concept of income elasticity of demand was developed, Hicks
believed that a minimum wage law would lead to a shift to capital-intensive
industries and that, other things being equal, unemployment would result.
Increased demand for labor in capital-intensive industries would not fully offset
decreased demand in labor-intensive industries. Hicks, The Theory of Wages,
p. 13.
In another connection Hicks found that if consumers of relatively capital-
using products have become richer relatively to consumers who spend their
income on labor-intensive products, the relative share of labor will increase. He
concluded, however, that "this is not an effect about which much can be said."
"A Revised Theory of Distribution," Review of Economic Studies, Oct. 1936, p. 8.
It is possible that Hicks has since revised his opinions on these questions as he
the released workers can be employed in easily mechanized mass-

production industries only if the national income increment over-
whelmingly accrues to them. But in this case there may be very little
incentive for the landowners to make the investment.
To illustrate numerically the effect of differences in income
inequality on capital accumulation and the use of labor, let us adopt
some arbitrary values for our model country. The population might
consist of 1,000,000 workers and 10,000 landowners and their depend-
ents. Real income per week might be 100,000,000 pesos, divided
equally between landlords and workers. This means a wage per
laborer of 50 pesos weekly or 2,600 pesos annually, and an average
annual rent per landowner of 260,000 pesos. As previously assumed,
for years there was little incentive to create large-scale manufacturing
industries because lack of demand kept the marginal efficiency of
capital too low.7 Now let this country follow a social pattern of
development similar to that of New Zealand or prairie Canada. Wages
might rise to three quarters of the national income, and rents fall to
one quarter. Specifically, wages would rise from 50 to 75 pesos weekly
or from 2,600 to 3,900 annually; average rental income would decline
from 260,000 to 130,000 pesos annually. With this reduced, though
still formidable income, landlords might feel compelled to be eco-
nomical. Labor would now be too expensive to be hired as butlers
and chauffeurs whenever the value of these services does not reach
75 pesos weekly per worker. In fact, the prerequisite for any worker's
employment must now be a marginal productivity 50 per cent higher
than before. Meanwhile, in the course of the transition, the marginal
efficiency of capital would rise. As long as the income elasticity of
demand for mass-produced goods is greater among workers than
landowners, the returns from investment in mechanized industries
will rise. If the income elasticity of the workers' demand for mass-
produced goods is very high, the marginal efficiency of both capital
and labor in mechanized industries will rise a great deal. Other
things equal, it would rise most rapidly in the most mechanized indus-
tries. Many servants would drift into factories. It might pay to
has on others. See his "The Economic Foundations of Wage Policy," Economic
Journal, LXV (Sept. 1955), 389-404.
7. In such economies savings are typically used to bid up the price of real
estate while flowing abroad in real terms. This situation is partly that "liquidity-
preference for land" which Keynes believed might have had "the same effect in
retarding the growth of wealth from current investment in newly produced capital-
assets, as high interest rates on long-term debts have had in more recent times."
Op. cit., p. 241.
equip the remaining servants with power mowers, mechanical egg

beaters, and automatic floor polishers. In short, the more mechanized
an economy is to be, the more it must be a high wage economy.8
In a somewhat different context, as Ricardo demonstrated, a rise
in wages compared with profits and interest will lower the relative,
cost of goods whose production involves long turnover periods.9 In
other words, a lower rate of return to capital in the aggregate reduces
the cost of using capital equipment. A decline in profits relative to
wages is, of course, entirely consistent with a rise in profits relative to
amounts invested if national income is growing. The ratio of capital
to labor may rise while the ratio of private capital to income declines.'
Moreover, high wages will increase the rewards from developing
labor-saving techniques and stimulate research and innovation. Expe-
rience with capital equipment will foster the inclination and ability
to innovate. Changes in one industry will create the need and oppor-
tunity for changes in another industry. A large-scale consumers'
goods industry will make a large-scale producers' goods industry
possible, and cheaper producers' goods will create the possibility of
marketing new types of consumers' goods or old types on a new scale.
Since the absolute yield from additions to the capital stock, from
applied science, and from organizational innovations will increase, a
8. The argument might be pushed to disturbing lengths. Even with perfect
equality, production might fail to reach maximum proportions. Further redis-
tribution might increase mechanization by shifting income from groups with
heterogeneous tastes to those with standardized tastes, encouraging conformity
at the expense of variety in decoration, foods, entertainment, etc. Moreover, any
country with a stereotyped and easily influenced population would be more likely
to grow rich than a nation of individualists.
No doubt considerations like these have led some economists to avoid all
explorations of income distribution because value judgments are necessarily
involved. The logic of their position seems less compelling to the extent that the
possible monotony of a machine age only replaces the existing monotony of
squalor.
9. David Ricardo, On the Principles of Political Economy and Taxation, ed.
Sraffa, p. 39.
1. A fall in profits relative to wages signifies a fall in the ratio of profits to
national incomeP/Y. But P/Y = P/K X K/Y, where K/Y is the capital
coefficient and P/K the profit rate. A decline in PlY in the face of a rise
signifies an even faster fall in K/Y. It may be that, because of heavy emphasis
on social overhead capital, a fall in K/Y is not typical of economic development
in its early stages. But in speaking of profits, we are referring to ratios involving
private capital only. The fall in the ratio of private capital to national income
may be more than offset by the rising ratio of public capital to national income.
The rise in the profit rate is possible as long as the public capital fails to receive
its proportionate share of the national income. Meanwhile, in this case, the ratio
of labor to national income is obviously falling even faster than the ratio of
private capital to national income.
larger volume of resources is likely to be allocated to the pursuit of

fundamental science and to current investment. In the terminology
of Professors Harrod and Domar, both the "warranted" or "full
capacity growth rate" and the "natural" or "full employment growth
rate" should increase.2 The productivity ratio of capital will rise,
and the average and marginal propensity to save will not fall suffi-
ciently to offset this rise, if indeed they do not also rise.
There should be no need to remind ourselves that during the
early stages of economic development a direct redistribution of pur-
chasing power may lead to increased per capita consumption at the
expense of desirable capital formation. Even in advanced societies
the channeling of workers into the production of capital goods may be
intimately associated with institutional arrangements that involve
an unequal distribution of income. In all such cases it would hardly
be wise to increase wages at the expense of a diminished rate of
growth. We would therefore have to restate our theory in terms of
consumption inequality or the distribution of consumption. Basically,
it is consumption inequality that is likely to channel workers away
from mass-production industries into luxury handicraft industries
and personal services.
Furthermore, if great income inequality is associated with only
moderate consumption inequality, its significance may be primarily
political and social. A group of wealth-investing Puritans could be
regarded as a distinguished caste of tax-collectors, charged with
maintenance and growth of a community's capital stock. The chief
reason the community tolerates their high incomes may be the antici-
pation of higher consumption for all through higher productivity for
all. As long as the consumption of the wealth-investors does not rise
faster than average consumption, the investors cannot be accused of
taking unfair advantage of their privileges, of diverting taxes for
capital formation to their own amusement.
It should be noted, however, that in so far as these high incomes
2. R. F. Harrod, Towards a Dynamic Economics. See also, D. Hamberg,

"Full Capacity vs. Full Employment Growth," this Journal, LXVI (Aug. 1952),
444-49; H. Pilvin, "Full Capacity vs. Full Employment Growth," this Journal,
LXVII (Nov. 1953), 545-52, with comments by R. F. Harrod and E. Domar,
pp. 553-63. See also, W. W. Rostow, The Process of Economic Growth.
A detailed theory of economic growth in terms of income distribution and
occupational shifts might be developed in terms of economic sectors, particularly
if the primary sector would include only agriculture, the secondary all highly
mechanized industries, and the tertiary all occupations in which relatively
unaided human skill limits productivity increases. See Martin Wolfe, "The
Concept of Economic Sectors," this Journal, LXIX (Aug. 1955), 402-20.
are derived from ownership, they may in effect be a tax on the use of
capital equipment and may thus discourage the most efficient pro-
ductive techniques. The more capital equipment is used in the
various stages of production, the higher will interest and other prop-
erty charges be. When necessary capital rationing is not the function
of such charges, they might render a roundabout process more costly
than efficient resource allocation would otherwise require. Removal
of these charges would tend to induce a shift to productive techniques
more economical of resources, and as Keynes once put it, this would
result in "the products of capital selling at a price proportioned to
the labor, etc., embodied in them on just the same principles as govern
the prices of consumption-goods into which capital-charges enter in
an insignificant degree."' Thus, from a social point of view, it is
preferable for the wealth-investors' (tax-collectors') high incomes to
be derived, say, from high prices (excise taxes), or from income taxes,
with no direct relation to the amount of capital equipment used in
production.
If, however, the prestige of individual "tax-collectors" comes
from the amount of taxes collected (income earned), and not from
the number of productive plants established, in other words, if the
prestige-patterns are somewhat like those affecting wealth-holders in
contemporary Western civilization, then the ability to collect taxes
must be tied to the establishment of productive plants. Tying taxes
to the control and use of capital equipment through the institution
of property is therefore the lesser evil in this context. It is the com-
munity's way of trying to make sure that the high money incomes will,
in fact, be invested.
III
That industrialization requires growing income or consumption

equality may be quite logical, even obvious; but empirical evidence
for the proposition is not easily produced. A clear picture cannot be
derived from annual statistics of income and expenditure. These
figures must be adjusted for the relative changes in the prices of mass-
produced wage-goods compared with prices of luxury handicraft goods
and personal services. In the attempt we inevitably slide into a maze
of index number problems.4 Moreover, the lack of adequate statistics
of any type, except for the most recent years, for underdeveloped
3. Keynes, op. cit., p. 221.
4. See Joan Robinson, "Notes on the Economics of Technical Progress."
The Rate of Interest and Other Essays (London: Macmillan and Co., 1952), p. 102.
countries makes comparison with trends in industrialized nations

difficult. This difficulty is reinforced by the variety of natural
resource complements and by the fact that trends in capital formation
and technological progress are not strictly proportional to each other
or to the (government-influenced) trends in consumption inequality.
Nevertheless, such data as are available at least do not contra-
dict our proposition. For the United Kingdom the income share of
the top 5 per cent of family units has declined from 46 per cent in 1880
to 43 per cent in 1910 or 1913, to 33 per cent in 1929, to 31 per cent in
1938, and to 24 per cent in 1947.6 In the United States the rate of
capital formation was highest during the years 1884-1898 when, due
to the lag in the secular decline of wages behind prices, income appears
to have been more evenly distributed than at other times between
1869 and 1914. In these years the rate of capital formation reached
16.1-16.2 per cent of national income. The rate of capital formation
remained above 13.0 per cent throughout the period 1869-1918, but
fell to 10.2 per cent for the decade 1920-1929. During this decade
the incomes of the top 5 per cent of spending units increased by 29
per cent, while the lower 95 per cent lost 4 per cent. From 1929 to the
years after World War II (average of 1944, 1946, 1947, and 1950),
the share of national income before direct taxes of thq top 5 per cent
fell from 31 per cent to 20 per cent.6
Has there been any comparable narrowing of income inequality
in countries which have shown little economic growth since 1850?
Data are not available. It is conceivable that the rich may once have
been richer, but it is hard to see how the poor could have survived at
all with a standard of living lower than today's in Burma, Iran,
Ecuador, Kenya and many other countries which had a per capita
5. These figures were cited by Professor Simon Kuznets in his American

Economic Association Presidential address, "Economic Growth and Income
Inequality," printed in the American Economic Review, XLV (March 1955), 4.
Their derivation was noted as follows, "For 1938 and 1947, Dudley Seers, The
Levelling of Income Since 1938 (Oxford, 1951), p. 39; for 1929, Colin Clark,
National Income and Outlay (London, 1937), Table 47, p. 109; for 1880, 1910, and
1913, A. Bowley, The Change in the Distribution of National Income, 1880-1913-
(Oxford, 1920)."
6. Simon Kuznets, "Economic Growth and Income Inequality," op. cit.,
p. 4; Shares of Upper Income Groups in Income and Savings (New York: National
Bureau of Economic Research, 1953), Table 122, p. 220; National Income, A
Summary of Findings (New York: National Bureau of Economic Research, 1946),
p. 53. Selma Goldsmith and others, "Size Distribution of Income Since the Mid-
Thirties," Review of Economics and Statistics, XXXVI (Feb. 1954), 1-32.
Percentages are calculated on the basis of 1929 dollars for capital formation
and would be slightly lower on the basis of current dollars.
income of less than $100 in 1949. The tenth annual report (1955) of
the United Nations Food and Agricultural Organization states that
for many underdeveloped countries per capita food consumption was
lower in the 1950's than in the 1930's. It is possible that declining
death rates in the face of almost unchanged birth rates, production
techniques, and capital stocks have lowered standards of living with-
out changing the degree of inequality. We do not know. We do
know that incomes in underdeveloped countries today are more
unequally distributed than incomes in the United States, Northern
Europe, and some British Dominions. The inverse correlation
between income inequality and per capita income in various countries,
shown in Table I, would of course be even stronger if allowances were
made for the more progressive incidence of taxation, the distribution
of free government benefits, and the relatively higher prices of handi-
craft goods in the wealthier countries.
TABLE I
SHARES OF NATIONAL INCOME OF UPPER AND LOWER INCOME GROUPS

AND PER CAPITA INCOME IN SELECTED COUNTRIES
Share of Top Share of Lowest Per Capita
20 Per Cent 60 Per Cent Income, Average
Country1 of Family of Family 1948, 1949 in
Spending Units Spending Units U. S. Dollars
(%) (%)
United States 44 34 $1,489
(1944, 1946, 1947,1950)
United Kingdom 45 36 775
(1947)
Denmark' 45 32 735
(1948)
Italy 49 31 230
(1948)
Ceylon 50 30 73
(1950)
India 55 28 57
(1949-1950)
Puerto Rico 56 24 275
(1948)
Sources: United Nations, Statistical Office, National Income and Its Distribution in Under-
developed Countries, Statistical Papers, Series E, No. 3 (New York: United Nations, 1951). Simon
Kuznets, "Economic Growth and Income Inequality," American Economic Review, XLV (March
1955), 20-21. W. S. and E. S. Woytinsky, World Population and Production, Trends and Outlook
(New York: Twentieth Century Fund, 1953), pp. 392-93.
l Dates apply to first two columns only.
2 Distribution of individual income tax returns.
Since our model country explored the effects of income distribu-

tion in terms of ownership and wages, it may be interesting to see
what the ratio of workers' compensation to ownership income is in
various countries. The significance of this ratio depends on the

assumption that ownership income is more unequally distributed, a
point which may lead to semantic difficulties. Only one of these is
that income receipts of farmers, independent professional workers,
and owner-managers of unincorporated businesses are not uniformly
handled by statisticians. Moreover, the proportion of such income
in 1949 varied from 12.4 per cent in the United Kingdom to 48.6 per
cent in Japan. Let us therefore confine ourselves to a number of
countries in which the portion of national income received by unin-
corporated enterprises varied no more than 7 per cent from 28 per
cent. If we compare the eight countries which fell into this category
and for which information also happens to be available for the late
1940's, it appears, as in Table II, that the higher the ratio of employ-
ees' compensation to profits, interest, rent, and royalties, the higher
the per capita income is likely to be.
We must repeat again that these correlations indicate only that
TABLE II
COMPARISON OF PERCENTAGE DISTRIBUTION OF NATIONAL INCOME

BY TYPES OF PAYMENT AND PER CAPITA INCOME IN SELECTED COUNTRIES
A B
Compensation Profits, Interest, Ratio of Per Capita
Country of Employees2 Rents, Royalties A to B Income, 1948
(%) (%) U. S. Dollars
Finland 60.9 14.3 4.3 $569
(1948)
Australia 54.0 16.9 3.2 812
(1948)
Switzerland 59.4 19.4 3.1 950
(1949)
Canada 58.8 19.7 3.0 895
(1949)
New Zealand 54.3 18.4 3.0 933
(1948)
Southern Rhodesia 48.9 22.0 2.2 105
(1949)
Chile 46.0 26.1 1.8 180
(1948)
Peru 42.2 24.1 1.7 82
(1947)
Source: United Nations, Statistical Office, National and Per Capita Income8, Seventy Coun-
trie8 - 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, World Population and Production,
Trend and Outlook (New York: Twentieth Century Fund, 1953), pp. 392-93.
1 Dates apply to first three columns only.
2 Covers all wages and salaries including employers' and employees' contributions to social
insurance and pension funds, payments in kind, and supplements such as commission, bonuses,
and tips.
in the course of economic development there has been a narrowing of

income inequality. They do not prove that a difference in income
inequality may at times be the key factor that accounts for different
rates of growth or levels of efficiency. Convincing empirical support
for such propositions depends on one's luck in finding situations in
which all other things happen to be equal. Two striking comparisons
that may come fairly close to this ideal involve (1) Argentina and
Australia and (2) British and American agriculture and manufacturing.
Argentina and Australia are both countries in the temperate
latitudes of the southern hemisphere that have been settled by Euro-
peans within the last three or four generations. Their climates (hot
summers and cool winters) are very similar; in fact, the variations in
temperature and rainfall of Sydney and Buenos Aires are almost
identical. Both Australia and Argentina have large arid hinterlands
of scrub woodland, but the Australian section is partly hotter and
drier. The principal products of both areas are wheat, beef, and wool.
These are exported to customers thousands of miles away. Other
products, oats, sugar cane, cotton, and fruit are generally consumed
at home. If deserts are excluded, Argentina is somewhat less densely
settled, and its chernozem soil is superior to Australian soils. Australia
has a little coal and iron ore, and Argentina a little petroleum.
The principal difference between the areas is that the social
structure is highly egalitarian in Australia and almost feudal in its
inequality in Argentina. According to Pareto coefficients developed
by Colin Clark, the income distribution of Argentina exhibits greater
inequality than that of many underdeveloped countries or of Europe
during the Middle Ages. On the other hand, Australia, the country
that pioneered wage boards and wage regulation, ranks just behind
New Zealand and Sweden in equality.7 In Australia the average
area per farm was 717.8 acres, and farms were mechanized and mostly
operated by their owners around 1948. In Argentina 70 per cent of
the land was in estates larger than 3,000 acres, and twothirds was
farmed by tenants. In the principal section, the Pampas, one-quarter
of the land was in estates larger than 75,000 acres (117 square miles),
owned by some fifty families. Good land was not for sale in small
amounts, and land sales were even too few to compute land values.
The landowners for decades have been able to exact very high rents
7. Colin Clark, The Conditions of Economic Progress, 2d ed., pp. 530-41.
The highest coefficients, indicating greatest equality, apply to contemporary
Sweden (2.15), New Zealand (2.35), and Australia (2.12). Argentina was found
to have a coefficient of only 1.2-1.3. In 1945 the coefficient for the United States
was estimated to be 1.95. Britain's coefficient was 1.75.
from their tenants whose incomes conversely were low even in years
of high prices. The reason for the high rents was apparently not the
lack of alternative estates to farm. As a matter of fact, 70 per cent
of the tenants remain on the same estate less than ten years. Accord-
ing to Professor Carl C. Taylor, the social cohesion of the landowners
has made substantial rent reduction, as well as rising from tenant to
owner, nearly impossible.
The low incomes of a large portion of the population and very
high incomes of a small minority have discouraged mechanization
and a shift to mechanized industries along the line of development
followed in Australia. It is hardly surprising that per capita con-
TABLE III
COMPARISONS, ARGENTINA AND AUSTRALIA

Argentina Australia
Population (millions, 1950) 17.2 8.2

Acres of Arable Land per Capita (1950) 4.1 3.4
Acres of Wheat (thousands; average 1949, 1950) 12,441 11,965
Acres of Arable Land per Tractor (1951) 4,732 247
Agricultural Population as Percentage
of Total Labor (1947) 36 16
Average Wheat Yield per Acre
(metric quintals; average 1949, 1950) 4.3 4.3
Textile Consumption per Capita
(metric pounds, around 1948) 17.8 21.3
Electricity Consumption per Capita
(kilowatt hours, around 1948) 255 1,160
Total Energy Consumption per Capita
(coal and coal equivalent of oil, gas, fuelwood,
and waterpower in metric pounds; around 1948) 1,780 5,440
Per Capita Income
(U. S. Dollars, 1948) 315 812
Source: W. S. and E. S. Woytinsky, World Population and Production, Trend8 and Outlook
(New York: Twentieth Century Fund, 1953), pp. 48, 402, 462-63, 472-73, 516-17, 546-47. United
Nations, Statistical Office, National and Per Capita Income8, Seventy Countrie8 - 1949, Statistical
Papers, Series E, No. 1 (New York: United Nations, 1950), pp. 14-16.
sumption of inanimate energy in Argentina was less than one-third

that of Australia. Per capita productivity in 1948-1949 was less
than half that of Australia, and the market per capita for manu-
factured goods, even those made of local raw materials, was often
smaller by an even greater proportion. During the 1930's an average
New Zealand urban employee, whose income and taste approximated
those of his Australian counterpart, spent about 36 per cent on things
other than food, rent, and clothing; while a similar Argentine worker
spent only 16 per cent of his much smaller, income in this way. In
1948 annual per capita income averaged $812 in Australia and $315
in Argentina.8
Differences in physical productivity between British and Ameri-
can agriculture and manufacturing also illustrate a direct effect of
social and income inequality on efficiency. The British population is
fairly homogeneous, at least to the extent that the social status of
British agricultural workers does not differ widely from that of British
industrial workers. A fair amount of social equality also charac-
terizes manufacturing and settled agricultural workers in the Ameri-
can Middle West, but it does not apply to racial minorities, particu-
larly Negro tenant farmers in the South and Puerto Rican or Mexican
migrants. These minorities have low social status and difficult access
to many occupations. They overcrowd a few occupations, command
low incomes, and can therefore be employed unproductively without
financial loss. They largely account for the fact that income shares
decrease at a decreasing rate from the first through the fourth quintile
of family spending units (44, 22, 16, and 12 per cent) and at an increas-
ing rate from the fourth to the fifth quintile (12 and 6 per cent).9 In
the United States about 70 per cent of Negro workers were in unskilled
occupations of all types in 1940, compared with only 19 per cent of
White workers.'
If the average American worker is more productive than the
average British worker, in what sector is this productivity difference
likely to be highest? Certainly not in that sector which employs the
largest proportion of Negroes because here the pressure to economize
on labor is weakest.
In 1940 33 per cent of American Negro workers were concen-
trated in agriculture, compared with only 19 per cent of White
workers. The low productivity of these Negroes and of migrant
foreign labor elsewhere brought the average productivity per man-
hour in American agriculture down to such an extent that in the
8. See: Preston James, Latin America (New York: Odyssey Press, 1950),
pp. 259-339. Carl C. Taylor, Rural Life in Argentina (Baton Rouge: Louisiana
State University Press, 1948), pp. 192-206. United Nations, Statistical Office,
National and Per Capita Incomes, Seventy Countries - 1949, Statistical Papers,
Series E, No. 1 (New York: United Nations, 1950), pp. 14-16. W. S. and E. S.
Woytinsky, World Population and Production, Trends and Outlook (New York:
Twentieth Century Fund, 1953), pp. 48, 392-402, 472-547.
9. Simon Kuznets, "Economic Growth and Income Inequality," op. cit.,
pp. 4-22.
1. U. S. Bureau of the Census, Sixteenth Census Reports, Comparative Occupa-
tion Statistics for the United States, 1870-1940, p. 189.
middle thirties physical productivity was only 1.03 times as great per
worker as in British agriculture. The relatively high incomes of
farmers and farm labor in the Dakotas, which were due to greater
mechanization in the face of lower per acre fertility, were offset by
the low incomes in the South. Physical productivity in American
manufacturing, which employed a low proportion of Negroes and
therefore had to economize on high-wage labor through mechaniza-
tion, was 2.15 times as great as in British manufacturing.2
IV
We have attempted to show the importance of social homo-

geneity and resulting patterns of income equality as factors conducive
to high productivity and the use of capital equipment. The intro-
duction of advanced machinery throughout an economy is, in part,
a function of the volume of saving, the available technology, and the
ratio of labor to natural resources. But patterns of ownership and
income distribution also affect the introduction of machinery by
(1) determining the proportion of the labor force employed in indus-
tries capable of intensive mechanization and (2) influencing the
marginal efficiency of capital in mass-production (that is mnass-
market) industries. A low degree of income inequality in a large and
prosperous economy may have no serious effect on growth. Such
inequality may largely reflect the changeable conditions of supply and
2. L. Rostas, Comparative Productivity in British and American Industry
(Cambridge: National Institute of Economic and Social Research, Occasional
Paper XIII, Cambridge University Press, 1948), pp. 89-91.
It should be noted that we are not comparing the relative productivity of
manufacturing and agriculture but only the relative productivity of (1) U. S.
manufacturing with U. K. manufacturing workers and (2) U. S. agricultural with
U. K. agricultural workers. The great difference in manufacturing productivity
was no doubt partly or largely due to a greater abundance of fuel and raw materials
in the United States. It is nevertheless possible that the American advantage in
agriculture was even greater.
The extent of the market and the indivisibility of certain productive proc-
esses, while important, do not appear to be the chief factors accounting for the
greater differential in manufacturing. Productivity in American manufacturing,
according to Rothbarth and contemporary observers was already higher in 1870
when the market for American goods was much smaller than the market for
British goods. Moreover, as Rostas found, between relative sizes of market and
relative productivity " . . . there does not appear to be a close relationship . . . in
a number of industries where the size of the industry is the same or smaller than
in Britain (e.g., breweries, wool) there is an advance in productivity in the U. S."
(ibid., p. 59). See also, E. Rothbarth, "Causes of Superior Efficiency of U. S. A.
Industry Compared with British Industry," Economic Journal, LVI (Sept. 1946),
383-90.
demand for various skills. But when income inequality derives,

directly or indirectly, from permanent differences in caste, race,
ownership, and the like, and if consumption inequality is the result,
then the marginal efficiency of capital in mass-production industries
will be lower than otherwise and the introduction of machinery will
be retarded. More assets may be held liquid or invested abroad, and
the proportion of the labor force employed as retainers, menial serv-
ants, and luxury handicraft workers will be high. In somewhat
archaic terms, when consumption inequality is great, workers can be
employed in occupations in which their marginal utility is low because
the marginal utility of the small amount of money paid to them is also
low and because their marginal productivity in all other occupations
is, and will remain, equally low.
W. PAUL STRASSMANN
UNIVERSITY OF MARYLAND

55.-Economic Growth and Income Distribution

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55.-Economic Growth and Income Distribution

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Economic Growth and Income Distribution

Author(s): W. Paul Strassmann

I. Introduction, 425. - II. Economic growth and growing income equality,

According to a straw man version of static price theory and wel-

* Professors Dudley Dillard, Daniel Hamberg, and Allan Gruchy of the

2. Harry G. Johnson, "The Macro-economics of Income Redistribution,"

the problem of Keynes and Hobson, who considered income inequality

It is our contention that, given a sufficiently large population,

from abroad. Let us assume the export industries cann

the released workers can be employed in easily mechanized mass-

equip the remaining servants with power mowers, mechanical egg

larger volume of resources is likely to be allocated to the pursuit of

2. R. F. Harrod, Towards a Dynamic Economics. See also, D. Hamberg,

That industrialization requires growing income or consumption

countries makes comparison with trends in industrialized nations

5. These figures were cited by Professor Simon Kuznets in his American

SHARES OF NATIONAL INCOME OF UPPER AND LOWER INCOME GROUPS

Since our model country explored the effects of income distribu-

various countries. The significance of this ratio depends on the

COMPARISON OF PERCENTAGE DISTRIBUTION OF NATIONAL INCOME

in the course of economic development there has been a narrowing of

COMPARISONS, ARGENTINA AND AUSTRALIA

Population (millions, 1950) 17.2 8.2

sumption of inanimate energy in Argentina was less than one-third

We have attempted to show the importance of social homo-

demand for various skills. But when income inequality derives,

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