Equality and efficiency in retrospect (3 graphs)
from David Ruccio
I remember my dismay, when I first began teaching economics, how enthralled my colleagues (at least the liberal ones) were with Arthur Okun’s notion of the fundamental tradeoff between equality and efficiency (which they supplemented with John Rawls’s theory of justice). No critique of capitalism, no critique of political economy. They believed the democratic process would find the appropriate balance between market efficiencies and nonmarket interventions to create greater equality.
I was never happy with the idea of such a tradeoff (or, for that matter, with the veil of ignorance), because it was based on denying the fundamental injustice embedded in a capitalist economy—the appropriation and distribution of a surplus produced by the majority for the benefit of a tiny minority at the top. And no amount of celebrating the supposed efficiencies of capitalist markets (which, for the most part, were simply assumed) or tinkering with the distribution of income (with tax-based redistribution) was going to fix that.
But what strikes me now is ultimately how disastrous was the framework developed by Okun (and by Rawls), given what has happened to the distribution of income and wealth in the United States since then (since 1975, when Okun first published Equality and Efficiency: The Big Tradeoff and when the first revision of Rawls’s A Theory of Justice appeared).
Consider, for example, the distribution of income. In 1975, the top 1 percent managed to capture almost 9 percent of national income; by 2013, its share had risen to over 20 percent.
A similarly dramatic change has occurred with the pay of top corporate executives. The CEO-to-worker compensation ratio has risen from 28 when Okun wrote to 296 today.
And, of course, the distribution of wealth—which has always been more unequal than the distribution of income—has also worsened: according to Emmanuel Saez and Gabriel Zucman [pdf], the share of the top 0.1 percent rose from 7.6 percent in 1975 to 22 percent in 2012.
I have every reason, then, to be even more critical of Okun (and, for that matter, Rawls) today than I was then. The idea that there was a tradeoff between equality and efficiency (or, in Rawls’s case, the notion that those at the bottom might benefit from inequality), and that we shouldn’t veer too far in creating more equal economic outcomes in the name of efficiency (and of justice), steered us away from imagining and implementing policies and institutions that would have prevented the return to a more and more unequal distribution of income and wealth. As a society, we could have taken such measures but we didn’t.
In retrospect, Okun’s approach (and that of Rawls) was the problem, not the solution