What price inequality?

If we start by asking whether we can reduce inequality while still enhancing market efficiency, we are assuming that ultimately we want to continue enhancing market efficiency; or at least we don’t want to push inequality-busting policies beyond the point at which efficiency would begin to erode.

In other words, we don’t want equality at any cost. First we want to know what the cost is. Then we can decide which changes are worth making, and which ones are just not worth it. This is the usual common sense approach that most people follow in making decisions.
 
Let us begin by acknowledging that there isn’t necessarily a trade-off to be made between equality and efficiency. Sometimes it's really win-win. Five seconds of thinking about our own experiences at work will make it obvious that the two things often support each other nicely. Equality and fairness are the hallmarks of a thriving and profitable enterprise. No employer ever achieved efficiency gains by being as nasty and vicious as possible to the workers – or not for very long, anyway. At best this would be a very short-term strategy: obviously in the short term you can make profit out of other people by the simple expedient of stabbing them in the back but before too long reality sets in and you get your comeuppance. So in this discussion we’re considering the vast majority of normal people who want to live and let live, not the tiny minority of sociopaths who would sell their own grandma for a penny or two. And if that’s how they treat their own family, God save you if you end up working for them. If you find yourself in such a situation at work there’s only one thing to do: flee for your life. This is how freedom works. Obviously in the long ago days of slavery you couldn’t easily flee such conditions but these days it’s really easy to make a cheap escape.
 
Back in the land of normal people, we can assume that equality and efficiency will usually complement and boost each other. Usually, but not always. Sometimes more equality is engineered only at the cost of reducing efficiency.

I am not arguing that all interventions offer gains in both equity and efficiency. In some cases, the proposals for measures to reduce inequality have efficiency costs. People who are being taxed more heavily under the progressive income tax may respond by reducing their work effort below the level they would choose if they received the full wage (the efficiency cost arises from the distortion of their choice). Employers faced with higher wage costs as a result of the increased minimum wage may offer fewer jobs.
 
Atkinson, Inequality: what can be done? p. 247.

That's a sophisticated way of saying that if you penalize profitability and clamp down on productive entrepreneurs in a misguided attempt to equalize everything, you may unwittingly end up with Atlas Shrugged conditions where all the handsome and wealthy men have fled to a tax haven, never to be seen again [Editor: actually the main hero of Atlas Shrugged is a woman].

Atkinson argues that ‘each situation has to be considered on its own merits’ because, especially when considered in the long term, ‘the effects may go either way’ and a loss in one respect (e.g. fewer jobs from the minimum wage) may result in long term gains in another respect (e.g. poor people finally getting a break and rising out of poverty). We can readily concede that markets are not perfect, never have been and never will be, so it is often necessary to make some kind of regulatory intervention. A good example is the laws that said no to chimney sweeps who wanted to continue sending little children up the chimney to sweep it out. Sure, that was an efficient way to clean out a chimney because small children under the age of 5 are perfectly chimney-sized (especially if they’re undernourished and skinny) and are therefore more likely to get the job done swiftly without getting stuck up there, thus minimizing costs for the homeowner, but no. Just no. That’s a good example of the type of law we can all get behind without worrying about inefficiencies and rising costs.
 
Atkinson’s case by case approach perhaps offers some common ground between those who think governments always suck and their ideological opponents who think governments always rock. It is at least a workable starting point in tackling some very difficult social issues.

In the natural course of things, where people are different and supplying different kinds of labour, there comes a point alas when equality can only be achieved by making somebody else worse off. There are three ways to respond to this.
 
The first is to say that nothing should be done to make some people better off, if it will have the effect of making somebody else worse off. This is how most people understand the concept of efficiency – an efficient market is one that has attained an equilibrium at which nobody can be made better off without making someone else worse off.
 
The second is to say that it’s perfectly ok to make rich people worse off if we can make poor people better off. Who cares if the rich are made worse off? Nobody, that’s who. Not even other rich people care when their rich friends are targeted for redistribution policies. They just strike them off the dinner party list and avoid them in case the bad luck is infectious. So what if they had been knighted by the Queen for their services to industry? Now that they are pariahs their former admirers just lobby for them to be stripped of their honours. Sir Fred the Shred, Sir Shifty - they all go the same way and you don't see anybody publicly admitting to being friends with them. So it's pretty safe to target them for a witch hunt.
 
The third is to say that doing something about inequality is better than doing nothing. That’s what governments are for – to do something. Nobody actually cares what they do, as long as they can be observed to be very busy doing something. Unless we are to descend into conditions of anarchy, where there is no government to look after everybody and so everybody has to stand on their own two feet and look after themselves [gasp!], then we must have big strong governments and there must be some policies for the government to implement so that everybody can feel secure and nicely looked after from the cradle to the grave.