• Equality vs. efficiency: Okun’s answer is …

    This isn’t a surprise. It comes around page 90 of Equality and Efficiency: The Big Tradeoff, by Arthur Okun.

    On what terms is the nation willing to trade equality for efficiency? Anyone who has passed a course in elementary economics can spout the right formal rule: promote equality up to the point where the added benefits of more equality are just matched by the added costs of greater inefficiency. As is often the case with the rules that are taught in basic courses, this one provides insight but is hard to apply to the real world. The consequences of most redistributive measures on both equality and efficiency are uncertain and debatable. Confronted with a proposed tax or welfare equalization, no legislator or votor can assess how much the program would add to equality or subtract from efficiency. Thus decisionmakers do not get opportunities in the real world to test neatly their priorities between the two competing objectives.

    Tests there are, that’s for sure, just not neat tests. Okun does offer a neat hypothetical however, which I’ll post soon. He concludes his book,

    A democratic capitalist society will keep searching for better ways of drawing boundary lines between the domain of rights and the domain of dollars. And it can make progress. To be sure, it will never solve the problem, for the conflict between equality and economic efficiency is inescapable. In that sense, capitalism and democracy are really a most improbable mixture. Maybe that is why they need each other — to put some rationality into equity and some humanity into efficiency.

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    • It’s odd to me that Okun is calling the Utilitarian maximizing principle the standard economic framework. This really amounts to not placing any independent value on equality of goods/income, but only an instrumental value for equality as a means to achieve greater overall efficiency (and aggregate utility). The only “equality” is in treating the utility of each person equally in the calculation (no prioritization by race, gender, class, etc.)

      I would have thought economists tend to fall into two camps: those who don’t believe in the maximizing principle at all as permitting government redistribution (libertarians and some conservatives) and those who adopt a Rawlsian Maxi-min approach (liberals or center-left capitalists).

      Also, it’s worth reminding that this discussion has an idealized view of capitalism and democracy. What is left out is interest group power as a corrupting force for both efficiency in capitalism and equality in democracy.

      • @Jonathan – Good points. Okun goes into interest group power. I have too, in my publications, columns, and on this blog. In this case, things have indeed been simplified. Sometimes there is value in that.