An Equality-Efficiency Trade-Off?
Gordon, David & Bowles, Samuel & Weisskopf, Thomas
The following forms a brief excerpt from Making Democracy Work by David Gordon, Samuel Bowles, and Thomas Weisskopf, printed here with the kind permission of the publisher, M.E. Sharpe & Co....
...Does it...
...If we could afford a democratic economic program, both in fiscal and resource terms, wouldn't redistribution of income from the top to the middle and bottom throw cold water on people's economic initiative...
...Increasing the extent of worker ownership of their workplaces would both enhance equality and reduce the extent to which resources must be allocated to workforce discipline—in the form of salaries of bosses and supervisors, for example—rather than to useful goods and services...
...The message is clear: greater equality can potentially boost economic performance...
...0.26 0.22 — 0.18— Cat 0.14...
...Gat...
...During the 1980s, for example, productivity growth in France was twice what it was in the United States while equality in the United States was almost 50 percent lower than in France...
...This larger sample of countries enables us to sharpen our test of whether income inequality is one of the keys to buoyant economic performance...
...Further, the level of investment depends critically on the level of capacity utilization, independently of movements in the profit rate, and income redistribution is likely to foster higher levels of capacity utilization because it will stimulate demand for consumer goods...
...As much as possible, we wanted to test for evidence that equality promotes or impedes economic effectiveness and not the other way around...
...Given those changes, movement toward both greater equality and higher average living standards is possible...
...Challenging a Popular Notion productive resources in the most sensible way and that, as a result, the economy is a zero-sum game—more of something means less of something else...
...bottom to top 20% 6.0 s.16...
...More generally, an "equality-efficiency trade-off " would lead one to expect a negative slope to the pattern of points—falling down and to the right from countries with strong economic performance and low equality to those with relatively poor performance and higher equality...
...512 • DISSENT...
...If we had measured income equality at the end of the period, we might have found a positive relationship between equality and economic performance but this might simply have meant that rapid productivity growth and high levels of investment promote income equality, not the reverse...
...0.0 We illustrate this pattern by two indicators of comparative economic performance: the rate of productivity growth and the level of investment in the advanced capitalist countries for the 1979-87 period...
...More equality necessarily means less efficiency, they warn, and hence fewer goods to be distributed...
...Japan's equality index is thus 0.23...
...Guaranteeing a top-quality education to all would have the same effect...
...income distribution is only half as equal...
...Not surprisingly, given these critical observations about mainstream expectations, it is difficult to find evidence in the real world of the "equality-efficiency" trade-off...
...If the "equality-efficiency" trade-off were correct, we would also expect that the United . States would have one of the highest degrees of income equality among those countries, helping to account for its lackluster economic performance...
...In the United States, for example, the bottom 20 percent received 3.6 percent of after-tax income in 1977 while the top 20 percent received 47.6 percent...
...proportion, and its income distribution is also twice as equal as that of the United States...
...Why would investors invest, inventors invent, and workers work hard if the winners win less and the losers lose less...
...Like productivity, investment may benefit from more rather than less equality...
...5.0 4.0 3.0 2.0 Fr...
...Ens...
...Ending racial and sexual discrimination, for example, would also eliminate the talent waste that occurs when gifted individuals end up in dead-end jobs or are underemployed because of their color or gender...
...We measure equality by the ratio of the share of all after-tax income received by the least affluent 20 percent of households to that of the most affluent 20 percent of households...
...Norway invests almost twice what the United States does in proportion to its gross domestic product, yet the U.S...
...Moreover, although economists often think it obvious that greater equality will dampen the incentive to invest, they base their conclusions on partial and therefore misleading analysis...
...South Korea invests well over twice the U.S...
...Indeed, one finds just the opposite: advanced capitalist countries with more equal distributions of income also display better economic performance— sustaining, for example, higher levels of investment and more rapid rates of produc 1.0 tivity growth...
...We are therefore encouraged about advocating democratic, egalitarian, and cooperative economic policies...
...In Japan, by contrast, the poorest 20 percent received 8.7 percent of after-tax income (in 1979) while the top 20 percent received 37.5 percent...
...Do we not need the stakes of economic success and failure to remain high in order for players to put everything they have into the game...
...growth rate...
...The after-tax profit rate does indeed have a strong influence on the level of investment...
...equality index of 0.08...
...We confine our attention to the 1980s, since this is a period Is Equality Bad for Economic Performance...
...Had we looked instead at the past thirty years, the graphs would not appear very different...
...ImmatmenVODP di redo d Income shares...
...The institutions and policies that promote equality also appear to promote productivity growth...
...Like many of the other notorious trade-offs of introductory economics, this notion depends on the assumption that we are already using our 510 • DISSENT TRADE-OFF...
...But this proposition is a myth...
...The greater the degree of income equality, the higher will be the relative share of the bottom fifth of the income distribution...
...Rather than having the highest degree of equality (to help account for its sluggish performance), the U.S...
...To the contrary, the pattern suggests if anything a positive slope...
...A society must balance its desire for a more just society, it is claimed, against the conflicting desire for affluence...
...economy has decidedly the highest degree of inequality...
...a) Equality & Productivity Growth Ave...
...And we add two more countries to our comparison in order to provide more examples of strong international performers (along with Japan): South Korea, which has recently leaped to the top of the charts in both productivity growth and investment performance, and Norway, which has boasted one of the highest shares of investment...
...Swe...
...But there is an obvious path toward transcending this "zero-sum illusion": we can make changes in economic policy and institutions that would dramatically reduce waste in the economy...
...More striking, equality in Japan was almost three times that of the United States and productivity growth was five times greater...
...What about the evidence...
...1"4c` • Gar...
...Economists are fond of referring to these objections to a more equal sharing of economic rewards as the "equity-efficiency" or "equalityefficiency" trade-off...
...Indeed, there is yet another flaw in the zero-sum illusion of the "equality-efficiency trade-off...
...Sharpe & Co...
...But the after-tax profit rate depends as much on the level of demand as on the tax rate and the wage rate—the variables most likely to affect negatively the after-tax profit rate in a democratic economy...
...0.041 1 0.20 0.060.1201 60.24 Index of Equality (b) Equality & Investment Performance Gross non-res...
...The graphs confound conventional expectations...
...An investment-equality trade-off similarly fails to materialize...
...it is illogical in theory and it does not prevail in practice...
...awe...
...The level of demand for consumer goods and services, in turn, is almost certain to increase from income redistribution to less affluent income groups (since less affluent groups spend more of their income on consumption...
...It is often the case that steps taken to promote equality may themselves directly contribute to making the economy work more effectively because many policies directly aimed at fostering equality would also boost productivity...
...By those measures, the United States ranked dead last among the "Big Seven" advanced capitalist countries plus Sweden...
...Granting employment opportunities to all would increase equality as well as reduce both the poverty and social alienation that breed drug use and criminality and, in turn, divert significant Equality Efficiency resources to the unproductive tasks of guard labor...
...U.S...
...Once again, we are reminded, no free lunch...
...The graphs below display the results of the comparisons, with Figure (a) mapping productivity growth against our equality index and Figure (b) comparing the share of investment with the same index of equality...
...The following forms a brief excerpt from Making Democracy Work by David Gordon, Samuel Bowles, and Thomas Weisskopf, printed here with the kind permission of the publisher, M.E...
...this results in a U.S...
...U.K 0.10 0.04 0.408 0.12 0.16 0.20 0.24 Index d Equality FALL • 1990 • 511 Equality Efficiency in which many believe that the U.S...
...economy did fairly well and the logic of right-wing economics was put to the test...
...In choosing a year in which to measure income equality, we tried to select a year, given the available data, toward the beginning of the 1979-87 period for which we are measuring economic performance...
...bottom to top 20% 0.30 S.PCm...
...The equality-efficiency trade-off provides a ready justification for economic inequality—with its proposition that reducing inequality is too costly...
...GDPNiorker a ratio of Income shares...
...These are analytic points...
Vol. 37 • September 1990 • No. 4
