 This is Professor Gerald Friedman, Department of Economics, University of Massachusetts at Amherst. And we're here today to talk about is inequality good? Last time, if you saw and remember, we talked about utilitarian arguments for an equal distribution of income. Now, one of the most prominent utilitarian economists of the 20th century United States was a man named Arthur Oaken, O-K-U-N. And in 1975, he presented a series of lectures at Harvard that he were published as a book that has been very widely cited, one of the most widely referenced works in economics in the late 20th century America called Equality versus Efficiency, The Great Trade-Off. Now, 1975 was an interesting year because it's arguable that that was the year things changed. For 30 years, the period that the French called the Glorious 30, Western societies, Western Europe, the United States, Japan, grew very rapidly and income distribution became more egalitarian, more equal. The poor gained on the rich until just about 75. And it's not all Oaken's fault, but since 75, more so in the United States than in Britain, more in Britain than the rest of Europe or Japan, income inequality has grown. We have moved away from an egalitarian distribution, especially in the United States. Now, Oaken, even in 75, raised the issue. If we are an egalitarian democracy, if we believe that everybody should have equal rights and be treated equally, then why do we tolerate what even in 1975 were very large disparities in income and life chances? Why do we allow some people to grow up poor and other people to grow up rich? Why don't we do more to equalize these disparities? Oaken's argument in a nutshell was that we tolerate inequality. We accept inequality because it's the price we pay for efficiency. We can reduce inequality, he says, only in a leaky bucket. Some of what we take from the rich to give to the poor will be lost through these leaks. As a society, we will be worse off. It may be, and Oaken believed it would be the case, that if we take from the rich and give to the poor, it's still worth it up to a very far point, but it will reduce total output. He identified three leaks. First, the loss of work incentives for the rich and the poor. The rich, he argued, won't work because of the high taxes that they'll pay to finance redistribution. The poor, he argues, won't work because they can just live off of what they're getting from the government. So that's the first leak. The second, the bureaucracy to administer this transfer. You have to have tax collectors, you have to have social workers, you have to have bureaucrats processing paper, moving checks from one person to another. And third is the loss of the big incentives, the types of incentives that spark major creative enterprises. Oaken would argue that somebody like Steve Jobs or Bill Gates would not, or Larry Page at Google, these people would not have created great new enterprises and new ideas, except for the possibility of making a big killing. So those are the three leaks he identifies, and those are the three constraints on inequality, on reducing inequality. Because of them, we're in a situation, Oaken argues, where society faces a downward sloping trade-off between equality and efficiency. We can maximize efficiency at a very low level of equality, or we can maximize equality at a very low level of efficiency. You have to choose where we're going to be in between, he argues. Because of these trade-offs, more equality, moving up the equality, you have to move in that direction and reduce efficiency. That's Oaken's argument. And this has been very popular. Economists have jumped on this. Businesses have jumped on it. All sorts of seemingly well-meaning people have written articles about, oh, it's just too bad. It would be nice if we could do more for the poor, but we just can't afford it because it would reduce efficiency too much. I'd like to help the poor. I'd like to pay more taxes for the poor, but ah, sigh. It would reduce efficiency. It would be bad for society. Unfortunately for Oaken, well, a couple of unfortunate things for Oaken. First is he died very soon after writing this. Yeah, he wasn't that old either. Fortunately for him, he didn't get to see what was done with his work because he would have put himself over here. But unfortunately for Oaken, he's just wrong. It's amazing how much research has been done on the Oaken effect. And nobody finds it. If you look across states in the United States, you don't get a downward slope. I mean, up here with high equality, you have Lamont. Down here with low equality, you have Mississippi. And you know what it looks like? It looks a little bit like this, the 50 states. More equalities associated with faster growth, more efficiency, higher income. The wealthiest, most productive parts of the country are the blue states, New England and the Pacific Coast and the upper Midwest in New York. The states down here with low equality, Mississippi, Alabama, they're like the third world compared to Vermont and California. You look within counties, same effect. More equality, higher productivity growth, higher income within the county. You look across countries, economic growth by countries. The fastest growth comes in the countries with more equality. The slowest growth comes in countries like Zaire and other third world countries where a few people control everything. Oaken is wrong. There is no association between inequality and greater efficiency. If anything, the effect goes the other way. More equality is associated with greater efficiency and there are good reasons for this. First, more inequality leads to more violence, more crime, distrust and more money being spent on incarceration and prison guards and police, etc. Wasteful spending. Transactions costs are higher in places with more inequality. More inequality, you want to make sure you're on top even if it means stealing and cheating. Second, competition, more inequality, the use of financial incentives undermines cooperation and team production. You want your team to work together well, they have to share, they have to cooperate, they have to believe that everybody's working together, not that everybody's working for one person. Third, more inequality is associated with poorer people. Those poor people are not able to care for their children as well, are not able to produce good human capital because they don't have the money for books, for medicines, for Suzuki violin lessons, etc. You take those together and what we have is Oaken was just wrong and the economic policies that for 30 years have been built on Oaken's recommendations are not only policies that he would have aboard, but they're policies that are misfounded. If we want more growth, if we want more productivity, if we want a happier society, we should be reducing not promoting inequality. Thank you and have a nice day.