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Quantitative Aspects of the Economic Growth of Nations: IV. Distribution Of Quantitative Aspects of the Economic Growth of Nations: IV. Distribution of National Income by Factor Shares Author(s): Simon Kuznets Reviewed work(s): Source: Economic Development and Cultural Change, Vol. 7, No. 3, Part 2 (Apr., 1959), pp. 1- 100 Published by: The University of Chicago Press Stable URL: http://www.jstor.org/stable/1151715 . Accessed: 19/12/2011 08:16 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. The University of Chicago Press is collaborating with JSTOR to digitize, preserve and extend access to Economic Development and Cultural Change. http://www.jstor.org ECONOMIC DEVELOPMENT AND CULTURAL CHANGE Volume VII, No. 3, Part II April 1959 QUANTITATIVE ASPECTS OF THE ECONOMIC GROWTH OF NATIONS IV. DISTRIBUTION OF NATIONAL INCOME BY FACTOR SHARES* Simon Kuznets, The Johns Hopkins University I. Conceptual Problems The distribution for recent years of national income by shares approxi- mating factor payments can be illustrated by using the United Nations Yearbook of National Accounts Statistics, 1957. 1 The following shares are distinguished: i. Compensation of employees--all wages, salaries, and supplements, whether in cash or kind, to normal residents employed by private and public enterprises, households and non-profit institutions, and general government. It also includes labor income paid by the rest of the world to the country's nor- mal residents and compensation of members of armed forces stationed abroad, overseas diplomatic and consular staffs, and employees on ships and aircraft of domestic carriers. The earnings are recorded before payment of taxes and deduction of social security contributions. Payments by employers to social security agencies on behalf of employees are considered part of the flow. ii. Income from unincorporated enterprises--income in money and kind accruing to individuals in their capacity as sole proprietors or partners of en- terprises and as independent professional men. Income from ownership of land, buildings, and financial assets is supposed to be excluded and put under item iii. iii. Income from property--all actual or imputed payments to individ- uals and private non-profit institutions in their capacity as owners of financial assets, land, and buildings. The major components are: rent--net of opera- tion costs and including the rental value of owner-occupied dwellings and farm- houses; interest--actual interest payments received by households and non- profit institutions, including interest on government bonds and imputed interest from life insurance companies, banks, and other financial intermediaries; dividends--including payments accruing to households and non-profit institu- tions from corporations and cooperatives; corporate transfer payments--grants by corporations to households and private non-profit institutions, and including allowances for bad debts. * This paper draws heavily upon work in the field initiated under the aus- pices of the Committee on Economic Growth of the Social Science Re- search Council. As with the other papers in the series, Miss Lillian Epstein provided indispensable assistance in preparing the tables and editing the text. 1. Statistical Office of the United Nations, New York, 1958. The defini- tions are given on p. x. 2 DISTRIBUTION OF NATIONAL INCOME BY FACTOR SHARES iv. Savings of corporations--the part of income earned by private corporations and cooperatives, and public corporations, which remains after direct taxes are paid and dividends distributed. This flow is supposed to be calculated with capital consumption on a replacement basis and with adjustment for changes in value of inventories. (Both of these adjustments apply also to item ii.) v. Direct taxes on corporations--taxes levied at regular intervals on profits, capital, or net worth. vi. General government income from property and entrepreneurship-- receipts by general government from government enterprises, as well as net rent, interest, and dividends accruing from the ownership of buildings or finan- cial assets. Profits and losses of state monopolies are not included; and an imputation of net rent is supposed to be made for buildings owned and occupied by the government. Since the sum of items i through vi includes (vii) interest on public debt and (viii) interest on consumers' debt, which can be viewed as transfers, items vii and viii are subtracted to yield national income. Disregarding for the moment obvious statistical difficulties in estimat- ing some of the shares just defined, we consider the more far-reaching con- ceptual questions. Their recognition is indispensable for a proper understand- ing and analysis of the results of the statistical comparisons which we use for this particular aspect of the economic growth of nations. Even though the questions prove unanswerable, we shall at least be on guard against facile misinterpretations of the statistical evidence. It may clarify matters if these questions are discussed under four heads: (a) the definition of the total to be allocated by factor shares; (b) the treatment of government interest and direct taxes; (c) the distinction among the several factors; (d) the primary and other levels of distribution. a. Since the factors whose shares are to be established are the only productive elements in the economy, the total is presumably the complete net product--at prices at which the factors enter input. But what is that net prod- uct ? The current definition treats it, in essence, as the factor price equivalent of consumers' outlay, private net capital formation, and goods purchased by the government; or, alternatively, as the sum of compensation of employees, en- trepreneurial income, net dividends, net rent, net interest payments (excluding those on government and consumer debt), and corporate savings gross of direct taxes--but with no provision for general government profit and loss. Two questions are at issue. The first is the justification for consider- ing all government outlay on commodities and services as final product, thus treating government as an ultimate consumer--not as a producer. Were we to argue that much of government activity is not final product but cost of operation, similar to that of business enterprise, we would have to allow for government savings just as we do for the savings of corporations--as the disparity between current receipts and disbursements, or alternatively, as the difference between the increase in debt and in assets. ECONOMIC DEVELOPMENT AND CULTURAL CHANGE 3 This problem (and some of the others that follow) has been discussed at length elsewhere, and there is no need to dwell upon it here. 2 The argument that government cannot be oriented to the income and loss test does not hold in the long run, if the test is understood in its true meaning--as relating real in- put to real output, both judged by a mechanism of social consensus--a meaning which in fact is also followed in the case of business enterprise. A government which does not meet this test, which over decades extracts large quantities of resources from the economy for which it returns very little in the form of direct services to individuals, additions to the capital stock, or improvement of the social framework, will fail, just like a private firm. And the need for analysis of the performance of governments in terms of both input and output has been made even more pressing in recent years by two circumstances. One is the gen- eral rise in the proportion of national resources absorbed by government in the free societies. The other is the emergence, particularly in the U.S.S.R., of relations between the government and the economy that cannot be subsumed under the conventional treatment described above. Government savings can be positive or negative, depending upon the bal- ance between its current revenues and expenditures. The inclusion of this item in the national income total, apportioned by distributive shares, will augment the weight of the items which, like corporate savings, are not allocable to indi- vidual recipients. It should be included on this ground alone, in order to show-- as present estimates fail to do--the growing difference between the national in- come total and the part allocated to individuals, households, or associations of them. The second question relates to the "netness" of the product. Some con- sumer outlay goods are essentially business expenses, i. e., necessary for the purpose of securing income and directly connected with the working process. Commuting expense to and from the job--an unavoidable item in a big metro- politan community- -is but one illustration of many that can be cited. Any al- lowance for such "grossness" of consumer outlay would appear in the distribu- tion by factor shares as a cost to be subtracted from compensation of employ- ees or income of unincorporated enterprises--but would hardly affect property income receipts, which are already estimated on a fairly "net" basis. The point is of some importance in connection with the interpretation of trends over time in the share of participation income (compensation of employees and in- comes of the self-employed) or in international differences in cross-section analysis: a rise in the share over time may be partly due to an upward trend in "grossness", i. e., increasing business expenses included in the wage, sal- ary, or the self-employed unit's income; and larger shares in the more devel- oped, urbanized countries than in the underdeveloped may be due to a larger element of "grossness" in the former. 2. See "Government Product and National Income", Income and Wealth, Series I, International Association for Research in Income and Wealth, Bowes and Bowes, Cambridge [England], 1951, pp.
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