Efficiency vs equality (part I)

Inequality is the topic du jour in the United States and surprisingly even in economics. Surprising, because in my time in academia, it was definitely rarely a topic of research in the field. For example, out of the 100 or so PhD job market papers (which is a good proxy for where economic research is heading) I was aware of between 2008-2011, I dont think a single one was about inequality. Further, only a few academics were publishing papers in top journals on the subject of inequality. Robert Lucas, a nobel prize winner, and undoubtedly speaking for many economists, said in 2004, “one of the tendencies of sound economics, the most seductive, and in my opinion the most poisonous is to focus on questions of distribution.” 

Implicit in this statement, Lucas is assuming that there is always a trade-off between efficiency and equality and that thinking about increasing equality (or lowering inequality) must necessarily lead to less efficiency and is therefore “poisonous.” However, this is wrong for a few reasons. First, the second fundamental welfare theorem in economics posits that there is a very important instance where there is no trade-off between equality and efficiency. There are numerous other economic policy instances where there is no trade-off between efficiency and equality. Second, I would contend that even Lucas would agree that there is likely a certain level of inequality that would lead to sub-optimal economic efficiency. Where that point is, is very hard to say but without scholarship, how would Lucas imagine we could eventually have insights on this. I think that Lucas, and others like him, are perpetually stuck in the Cold War era, where thinking about issues of inequality meant “communism.” While there is no doubt that “communism” was a failure, economists and other scholars do a dis-service by not better understanding inequality. Forever drudging up the specter of communism as if that were the only alternative to an “efficient” model is intellectually dishonest. So with that opening salvo, more of my opinions on efficiency vs equality, inequality to come.