What do we know about inequality and efficiency?
Inequality And Efficiency
Is there an equality-efficiency trade-off? Is greater inequality just the price we pay for more efficiency?
Economic theory has proven, one hears, that any but cosmetic modifications of capitalism in the direction of equality and democratic control will exact a heavy toll of reduced economic performance.
Bowles, 2012
Some nations are economically more successful than others. Others are more equal. Some are both more successful and more equal than others. As such, we need to better understand in what circumstance efforts to reduce inequality make the pie smaller. If inequality is a price, why not make it as low as possible?
We also want to know whether reduced inequality could actually grow the pie. Sam Bowles at the Santa Fe Institute has constructed a detailed economic analysis. This suggests that greater equality can lead to greater efficiency.
“..there are compelling economic arguments and ample empirical support for the proposition that there exists changes in the rules of the economic game which can foster both greater economic equality and improved economy performance
Bowles, 2012
Explains His Assumptions
Not everyone will agree with Bowles. Still, I appreciate that he details his assumptions. In doing this he explains his thinking. This contrasts with many public discussions. These seem to occur at a very superficial level. Yes, it is reasonable to say that a very high minimum wage could lead to significant layoffs. But what level is very high? Are we near there yet? Is there any change we can make to mitigate any negative impact?
If someone tells you that “X always leads to Y” ask them why. Can they explain the assumptions behind their model of the world? For instance, do they assume risk neutrality? Complete information? What about pure selfishness? People who can explain their assumptions are worth talking to. You can discuss if their thoughts make sense in any given circumstance. If they can’t detail the assumptions they probably don’t know what they are talking about. The worst is if they say “this is just common sense”. I’d advise smiling, nodding, and backing away slowly.
Equality And Efficiency?
My point is not that Bowles is right to say equality is not the enemy of efficiency. (Although I think he may be right). Instead, read his work and decide for yourself. My point is that we shouldn’t make an unnecessary assumption. Assuming greater inequality is always necessary for more efficiency will lead to greater and greater inequality. The problems inequality brings means we should at least think deeply whether inequality is always a price we must pay.
For more on assumptions see here
For more on economics see here, and here.
Read: Samuel Bowles, The New Economics of Inequality and Redistribution (2012), Cambridge University Press