Kuznets Curve: A Simple Dynamical System-Based Explanation

In the 1950s, a future Nobelist Simon Kuznets discovered the following phenomenon: as a country’s economy improves, inequality first grows but then decreases. In this paper, we provide a simple dynamical system-based explanation for this empirical phenomenon. 1 Kuznets Curve: A Brief Reminder and Need for an Explanation What is the Kuznets curve. In the 1950s, Simon Kuznets, an American economist of Russian origin, showed that as the country’s Gross Domestic Product (GDP) increases, inequality first increases and then decreases again [1, 2, 4]. The resulting dependence on inequality on GDP looks like an inverted letter U and is thus called an inverted U-shaped dependence or the Kunzets curve. For this work, Professor Kuznets was awarded a Nobel Prize in Economics in 1971. Kuznets curve: a controversy. The Kuznets curve is a purely empirical observation. Economists from different sides of the political spectrum have come up with different (and mutually exclusive) explanations for this empirical fact. On the one hand, free-market champions use the Kuznets curve as an argument that the governments should not interfere with the free market: inequality will decrease by itself, as soon as the economy improves further. As Ronald Reagan used to say, The rising tide lifts all the boats. Based on this argument, these economists Thongchai Dumrongpokaphan Department of Mathematics, Faculty of Science, Chiang Mai University, Thailand, e-mail: [email protected] Vladik Kreinovich Department of Computer Science, University of Texas at El Paso, 500 W. University, El Paso, Texas 79968, USA, e-mail: [email protected]