Thursday, September 22, 2011

Fairness v. Efficiency? Maybe Not.

An article in the new issue of the International Monetary Fund's publication Finance and Development raises interesting and important questions about the conventional wisdom (since Okun) that efforts to reduce inequality  necessarily reduce the efficiency of production (e.g., by reducing incentives to engage in productive activity). Andrew G.  Berg and Jonathan D. Ostry report on a couple of their own empirical studies finding that over a longer run, economic growth is not reduced by efforts to increase equality; to the contrary, they find that such may even constitute a precondition for long-run economic growth (e.g., by reducing social tensions associated with inequality that can interfere with productive activity).

My own intuition is that there is probably a possibly unknowable and probably shifting level of equality/inequality at which long-run economic growth would be maximized/optimized. Either too little or too much equality would likely lead to a reduction in production, raising the probably unanswerable question, how can we get it just right?

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