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Equality and Efficiency: The Big Tradeoff
"
Contemporary American society has the look of a split-level structure. Its political and social institutions distribute rights and privileges universally and proclaim the equality of all citizens. Yet economic institutions, with efficiency as their guiding principle, create disparities among citizens in living standards and material welfare. This mixture of equal rights and unequal economic status breeds tensions between the political principles of democracy and the economic principles of capitalism. Whenever the wealthy try for extra helpings of supposedly equal rights, and whenever the workings of the market deny anyone a minimum standard of living, ""dollars transgress on rights""—in the author's phrase. In this revised and expanded version of the Godkin Lectures presented at the John F. Kennedy School at Harvard University in April 1974, Arthur M. Okun explores the conflicts that arise when society's desire to reduce inequality would impair economic efficiency, confronting policymakers with ""the big tradeoff."" Other economic systems have attempted to solve this problem; but the best of socialist experiments have achieved a greater degree of equality than our mixed capitalist democracy only at heavy costs in efficiency, and dictatorial governments have reached heights of efficiency only by rigidly repressing their citizenry. In contrast, our basic system emerges as a viable, if uneasy, compromise in which the market has its place and democratic institutions keep it in check. But within the existing system there are ways to gain more of one good thing at a lower cost in terms of the other. In Okun's view, society's concern for human dignity can be directed at reducing the economic deprivation that stains the record of American democracy—through progressive taxation, transfer payments, job programs, broadening equality of opportunity, eliminating racial and sexual discrimination, and lowering barriers to access to capital.
"
Contemporary American society has the look of a split-level structure. Its political and social institutions distribute rights and privileges universally and proclaim the equality of all citizens. Yet economic institutions, with efficiency as their guiding principle, create disparities among citizens in living standards and material welfare. This mixture of equal rights and unequal economic status breeds tensions between the political principles of democracy and the economic principles of capitalism. Whenever the wealthy try for extra helpings of supposedly equal rights, and whenever the workings of the market deny anyone a minimum standard of living, ""dollars transgress on rights""—in the author's phrase. In this revised and expanded version of the Godkin Lectures presented at the John F. Kennedy School at Harvard University in April 1974, Arthur M. Okun explores the conflicts that arise when society's desire to reduce inequality would impair economic efficiency, confronting policymakers with ""the big tradeoff."" Other economic systems have attempted to solve this problem; but the best of socialist experiments have achieved a greater degree of equality than our mixed capitalist democracy only at heavy costs in efficiency, and dictatorial governments have reached heights of efficiency only by rigidly repressing their citizenry. In contrast, our basic system emerges as a viable, if uneasy, compromise in which the market has its place and democratic institutions keep it in check. But within the existing system there are ways to gain more of one good thing at a lower cost in terms of the other. In Okun's view, society's concern for human dignity can be directed at reducing the economic deprivation that stains the record of American democracy—through progressive taxation, transfer payments, job programs, broadening equality of opportunity, eliminating racial and sexual discrimination, and lowering barriers to access to capital.
"
137 pages, Paperback
First published May 1, 1975
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Displaying 1 - 21 of 21 reviews
February 27, 2019
2/22/2019 - 2/24/2019
It is striking how much wisdom is packed into this short book (originally a set of lectures Arthur Okun delivered at the Harvard Kennedy School). It is also striking how well it has aged. In fact, much of it reads as if it is participating in contemporary debates, although. I am not sure that is a reflection on Okun's timelessness or the staleness of the contemporary debates.
For example, Okun argues against using the reduction of political power as a justifications for more progressive taxation or anti-trust enforcement--something that one hears increasingly lately. Okun supports progressive taxation as a way to raise revenue from people who would not miss it very much, but argues (persuasively, in my view) against the political rationale, writing, "The key remedies must be specific aids and sanctions rather than general efforts to curb bigness and wealth. Breaking a $20 billion corporationcorporation into ten $2 billion pieces still leaves entities large enough to transgress political rights, if such actions are tolerated by the law. Even if the most ambitious program of progressive taxation were enacted, Howard Hughes would retain more than enough money to produce counterfeit votes. It is no easy task to formulate and enforce specific and detailed rules of the game that would prevent him from spending money to acquire undue power. But I find that route far more promising than one that seeks to curb his power by taking his money away."
The argument that Okun is most famous for is the tradeoff between efficiency and equity that he captures in his leaky bucket metaphor: you take $1,000 from a high-income person but only deliver, say, $500 to someone of more moderate income. Would you do it? Forty years of progressives have defined themselves around the rejection of this metaphor, arguing that inequality-reducing policies promote economic growth by allowing people to better utilize their human capital, trust each other, break up rent seeking, and the like. All of this is likely true at least some of the time, as Okun himself recognized. But the opposite, the case of tradeoff, is also true some of the time. And it is this situation that presents the biggest challenge for public policy and thus merits the most discussion.
In fact, if we were doing public policy right the equality-efficiency tradeoff would be operative for all public policies, because we would already have done all of the policies that improved on both dimensions and so would only be left with the ones that were a tradeoff. It is the failure of public policy, and there are many, that makes Okun's insight less general than it ought to be but still very relevant.
It would be a mistake, however, to reduce the book to one long argument about a leaky bucket. In fact, Okun does not even get to this until his last chapter. Prior to that he developed a Michael Sandel-like "spheres of justice" argument for the importance of the market but limiting it to the allocation of baubles and trinkets like swimming pools while (sometimes inefficiently) allowing the rights to the basis for the allocation of other more fundamental goods, like political power which in theory should be distributed equally with one person, one vote.
Ultimately Okun's arguments are grounded in a consequentialism that judges policies and systems not based on any special value but on their outcome. He rejects Friedman-ites for capitalism as inherently good because of freedom (my freedom to use my private property is denying your freedom to use it) and also Friedman-ite arguments for the fairness of the ensuing distribution (even if people are paid their marginal products that should have no special ethical status). But he does strongly defend the market for its track record on efficiency while demonstrating (in this case slightly dated but still true) that socialism has massively underperformed.
The book is a deep exploration of philosophy, politics, and economics. My one complaint is that as precise as Okun's thinking often is, he never lays out his normative assumptions with any great clarity. He presents some good arguments against conferring any natural and inherent meaning on freedom, but would these apply to my freedom not to have you harvest my organs for the greater good? My property rights in my organs don't seem as arbitrary as the Sandler's property rights in the patent-derived profits of Oxycontin. In sometimes taking on the easy cases he fails to fully explain his basis for supporting equality and judging largely based on outcomes. I say this less as a critic, and more to express my mild--and only mild--disappointment that he missed a few chances to give me better arguments for the views I largely share.
That is a small quibble, this is another must read economics book that will help clarify your understanding of today's biggest economic debates.
5/10/2015-5/13/2015
I just re-read this after 25 years. Rather than the simple and overly reductive memory I had from the foil that the title has become, I found the book to be thoughtful, nuanced, more modern than I expected (or we have progressed less than I had thought), and it actually affected my thinking somewhat. Brookings did a service by reissuing it, including the excellent introduction by Larry Summers.
It is striking how much wisdom is packed into this short book (originally a set of lectures Arthur Okun delivered at the Harvard Kennedy School). It is also striking how well it has aged. In fact, much of it reads as if it is participating in contemporary debates, although. I am not sure that is a reflection on Okun's timelessness or the staleness of the contemporary debates.
For example, Okun argues against using the reduction of political power as a justifications for more progressive taxation or anti-trust enforcement--something that one hears increasingly lately. Okun supports progressive taxation as a way to raise revenue from people who would not miss it very much, but argues (persuasively, in my view) against the political rationale, writing, "The key remedies must be specific aids and sanctions rather than general efforts to curb bigness and wealth. Breaking a $20 billion corporationcorporation into ten $2 billion pieces still leaves entities large enough to transgress political rights, if such actions are tolerated by the law. Even if the most ambitious program of progressive taxation were enacted, Howard Hughes would retain more than enough money to produce counterfeit votes. It is no easy task to formulate and enforce specific and detailed rules of the game that would prevent him from spending money to acquire undue power. But I find that route far more promising than one that seeks to curb his power by taking his money away."
The argument that Okun is most famous for is the tradeoff between efficiency and equity that he captures in his leaky bucket metaphor: you take $1,000 from a high-income person but only deliver, say, $500 to someone of more moderate income. Would you do it? Forty years of progressives have defined themselves around the rejection of this metaphor, arguing that inequality-reducing policies promote economic growth by allowing people to better utilize their human capital, trust each other, break up rent seeking, and the like. All of this is likely true at least some of the time, as Okun himself recognized. But the opposite, the case of tradeoff, is also true some of the time. And it is this situation that presents the biggest challenge for public policy and thus merits the most discussion.
In fact, if we were doing public policy right the equality-efficiency tradeoff would be operative for all public policies, because we would already have done all of the policies that improved on both dimensions and so would only be left with the ones that were a tradeoff. It is the failure of public policy, and there are many, that makes Okun's insight less general than it ought to be but still very relevant.
It would be a mistake, however, to reduce the book to one long argument about a leaky bucket. In fact, Okun does not even get to this until his last chapter. Prior to that he developed a Michael Sandel-like "spheres of justice" argument for the importance of the market but limiting it to the allocation of baubles and trinkets like swimming pools while (sometimes inefficiently) allowing the rights to the basis for the allocation of other more fundamental goods, like political power which in theory should be distributed equally with one person, one vote.
Ultimately Okun's arguments are grounded in a consequentialism that judges policies and systems not based on any special value but on their outcome. He rejects Friedman-ites for capitalism as inherently good because of freedom (my freedom to use my private property is denying your freedom to use it) and also Friedman-ite arguments for the fairness of the ensuing distribution (even if people are paid their marginal products that should have no special ethical status). But he does strongly defend the market for its track record on efficiency while demonstrating (in this case slightly dated but still true) that socialism has massively underperformed.
The book is a deep exploration of philosophy, politics, and economics. My one complaint is that as precise as Okun's thinking often is, he never lays out his normative assumptions with any great clarity. He presents some good arguments against conferring any natural and inherent meaning on freedom, but would these apply to my freedom not to have you harvest my organs for the greater good? My property rights in my organs don't seem as arbitrary as the Sandler's property rights in the patent-derived profits of Oxycontin. In sometimes taking on the easy cases he fails to fully explain his basis for supporting equality and judging largely based on outcomes. I say this less as a critic, and more to express my mild--and only mild--disappointment that he missed a few chances to give me better arguments for the views I largely share.
That is a small quibble, this is another must read economics book that will help clarify your understanding of today's biggest economic debates.
5/10/2015-5/13/2015
I just re-read this after 25 years. Rather than the simple and overly reductive memory I had from the foil that the title has become, I found the book to be thoughtful, nuanced, more modern than I expected (or we have progressed less than I had thought), and it actually affected my thinking somewhat. Brookings did a service by reissuing it, including the excellent introduction by Larry Summers.
May 10, 2021
When I picked this up, I was afraid it'll read like one of the heavily jargoned books as it was authored by a heavyweight economist. I am pleased to report I was very wrong.
Okun's masterpiece explores the various arguments in defense of both equality and efficiency, and introduces the reader to nuances of the tradeoffs through discussions of libertarian, Rawlsian, utilitarian and even Marxist philosophy but also through ample examples and models (in this case the models felt more like thought experiments). Most importantly, there is no ideological servility in the book (at least did not seem so to me) - just a lot of persuasive arguments with a healthy amount of skepticism towards any notion of one "right answer".
For an interested reader in hurry, I recommend starting with the last chapter (Further thoughts on equality and efficiency) as it is the most adequate summary of the book by Okun himself.
Okun's masterpiece explores the various arguments in defense of both equality and efficiency, and introduces the reader to nuances of the tradeoffs through discussions of libertarian, Rawlsian, utilitarian and even Marxist philosophy but also through ample examples and models (in this case the models felt more like thought experiments). Most importantly, there is no ideological servility in the book (at least did not seem so to me) - just a lot of persuasive arguments with a healthy amount of skepticism towards any notion of one "right answer".
For an interested reader in hurry, I recommend starting with the last chapter (Further thoughts on equality and efficiency) as it is the most adequate summary of the book by Okun himself.
September 17, 2020
I had this slim volume for a policy analysis class in college and never finished it. I picked up for unclear reasons and read it completely. The more general parts were somewhat economically/philosophically interesting and well-argued. Having been written in 1975, parts were woefully out-of-date. It could be a bit distracting when Okun talked in specific monetary terms considering inflation, and, in some profound ways, how different a world/economy we currently live in. Still and all, it was a worthwhile read; I'd like to check out a modern treatment of the topic.
June 11, 2024
Okun's book offers highly valuable insights but it has also aged substantially. The American economy he describes and that he uses as a reference for his arguments has dramatically changed since the time he wrote: inequalities in income and wealth have increased enormously, intergenerational mobility has plummeted, and growth has decreased. These changes were brought by more liberalizing policies that gave the market more space to shape production and hence income distribution. The trade-off between equality and efficiency did not materialize: more inequality has not led to more growth, actually, if anything, it has led to less. I wonder what conclusion Okun would have drawn from this. I suspect that he would have emphasized the capturing of anti-competitive forces of both large chunks of the market and the political arena. By underlining this, Okun's point does not challenge the market but rather its imperfections. I am for my side more skeptical: if greed is the engine of the market, why it should stop devouring everything it encounters?
December 25, 2011
Okun clarifies the issues surrounding the tradeoff between equality and efficiency, rather than taking a firm position on the issue of how much society should exchange one for the other. Was rather hoping for a more spirited point-of-view than this highly-academic elucidation of the issue. Reading this will illustrate just how extreme the Republican party has moved since the book's original publication in the mid-1970's.
May 25, 2023
More books should mimic this format. Efficiency and Equality reads more like lecture notes than it does a book, such that each sentence is chock-full of insight. Reading books like this reminds you how much of modern books are filler. Here are some insights from the book:
I: America is radically egalitarian when it comes to political rights but not economic welfare. When it comes to rights and duties, for example, America prides itself on its egalitarian ethic: everyone, no matter their background or identity, has the freedom of speech. This universal guarantee comes from our deep belief in the equality of each and every individual.
Yet, despite this legal guarantee, we tolerate vast economic inequality. The equality of man does not prevent billionaires eating caviar on yachts while a fifth of children in the United States go to bed hungry.
I remark on this not as a reason to tax the rich more – although I do think we should – but instead as a reflection on how to reconcile these two belief systems. After all, freedom to protest probably matters far less to a destitute family in America than the right to sufficient quantities of food. Yet, we guarantee the former and not the latter.
The clearest and most repeated answer is that we tolerate inequality as the price of efficiency. In other words, inequality reflects efficient market processes, and, while not ideal, must exist in some form in order to increase the size of the economic pie
That is an interesting and important empirical question, but I want to bracket it for now. Instead, let’s ask how much we value equality per se. If some group of Americans could not vote – independent of the deleterious outcomes this disenfranchised status would create – it would be bad in some, abstract deontological sense. We’d be willing to pay a collective price to ensure universal enfranchisement if only for the reason of guaranteeing the dignity and rights of each voter.
Similarly, we should think more about inequality as a moral blight per se. None of this shows that our current tax system is unjust. It’s all a question of trade offs and margins, but on one side of the ledger, we should definitely view “economic dignity” as important and weigh that against any potential efficiency gains of inequality.
Other miscellaneous insights:
II. We permit the trade of goods but not rights (i.e. we can’t sell our freedoms and we don’t ration freedoms), indicating we’re willing to permit inefficiencies in the “market for rights.”
But, he economic life inevitably intrudes on the political: more money can buy better lawyers or be used to lobby politicians.
III. Breaking up businesses or taxing wealth won’t stop their political power. Jeff Bezos would still have political clout if he were worth half as much. (This same argument applies to the state: coercion need not come from an oversized government.)
IV: For most of human history, restrictions on trade were mostly to support class structures, e.g. caste positions or feudal obligations.
V: Questions of economic liberty are hard to parse. If you ban a seller from discriminating against customers, the net effect on liberty is hard to parse. The freedom of the businessman comes at the expense of the customer.
I: America is radically egalitarian when it comes to political rights but not economic welfare. When it comes to rights and duties, for example, America prides itself on its egalitarian ethic: everyone, no matter their background or identity, has the freedom of speech. This universal guarantee comes from our deep belief in the equality of each and every individual.
Yet, despite this legal guarantee, we tolerate vast economic inequality. The equality of man does not prevent billionaires eating caviar on yachts while a fifth of children in the United States go to bed hungry.
I remark on this not as a reason to tax the rich more – although I do think we should – but instead as a reflection on how to reconcile these two belief systems. After all, freedom to protest probably matters far less to a destitute family in America than the right to sufficient quantities of food. Yet, we guarantee the former and not the latter.
The clearest and most repeated answer is that we tolerate inequality as the price of efficiency. In other words, inequality reflects efficient market processes, and, while not ideal, must exist in some form in order to increase the size of the economic pie
That is an interesting and important empirical question, but I want to bracket it for now. Instead, let’s ask how much we value equality per se. If some group of Americans could not vote – independent of the deleterious outcomes this disenfranchised status would create – it would be bad in some, abstract deontological sense. We’d be willing to pay a collective price to ensure universal enfranchisement if only for the reason of guaranteeing the dignity and rights of each voter.
Similarly, we should think more about inequality as a moral blight per se. None of this shows that our current tax system is unjust. It’s all a question of trade offs and margins, but on one side of the ledger, we should definitely view “economic dignity” as important and weigh that against any potential efficiency gains of inequality.
Other miscellaneous insights:
II. We permit the trade of goods but not rights (i.e. we can’t sell our freedoms and we don’t ration freedoms), indicating we’re willing to permit inefficiencies in the “market for rights.”
But, he economic life inevitably intrudes on the political: more money can buy better lawyers or be used to lobby politicians.
III. Breaking up businesses or taxing wealth won’t stop their political power. Jeff Bezos would still have political clout if he were worth half as much. (This same argument applies to the state: coercion need not come from an oversized government.)
IV: For most of human history, restrictions on trade were mostly to support class structures, e.g. caste positions or feudal obligations.
V: Questions of economic liberty are hard to parse. If you ban a seller from discriminating against customers, the net effect on liberty is hard to parse. The freedom of the businessman comes at the expense of the customer.
March 9, 2023
Was surprised that the book was quite balanced on principles, but more unfounded in empirics.
Okun's argument is that although it would be normatively desirable to have an "equal society" (contrary to the Friedmann view), then it always comes at the cost of efficiency, and rooted in efficiency, Okun makes strong arguments for the market.
What is the competing model of organization to the market? Well its 1975, so its USSR socialism. Okun gets off to easily, because comparing the US to the USSR, well, it's going to be easy to see (in hinsight) what is more desirable.
When I'm hearing a trade-off, then I want to see something were efficiency decreases for each policy that pursues equality, so a more compelling argument would engage with Scandinavian countries or the like.
But, good book.
Okun's argument is that although it would be normatively desirable to have an "equal society" (contrary to the Friedmann view), then it always comes at the cost of efficiency, and rooted in efficiency, Okun makes strong arguments for the market.
What is the competing model of organization to the market? Well its 1975, so its USSR socialism. Okun gets off to easily, because comparing the US to the USSR, well, it's going to be easy to see (in hinsight) what is more desirable.
When I'm hearing a trade-off, then I want to see something were efficiency decreases for each policy that pursues equality, so a more compelling argument would engage with Scandinavian countries or the like.
But, good book.
October 2, 2022
3.5 rounded up to four. A short important read, at times heavy and somewhat dense in places. It's not like you're having to read Samuelson's economics primer again, but you're forced to concentrate on each passage like you were studying for a test. I caught myself rereading passages to ensure I was comprehending what I just read. And sometimes after rereading it, I still wasn't sure if I fully got it. The reward settles in eventually, when you walk away having a better understanding of how we can balance, from a policy perspective, whether it's better to be brutally efficient or blindingly magnanimous. Okun leaves it up to you to decide.
December 23, 2022
I was reading articles about the trade-off between equality and efficiency and some of the articles mentioned this book as the pinnacle of thought around the subject. It's dry and pedantic at times. I appreciated some of his examples in trying to flesh out the concept. My interest was in his approach to distributive justice but there wasn't a lot there. In the end, Okun provided some interesting things to think about but his book did not scratch the itch.
August 14, 2023
Worth reading for the famous “leaky bucket” analysis in the last chapter alone, let alone the normative and pragmatic insights of the whole thing. I will say some parts of it (such as its characterization of socialism as central planning) do reveal its age, and it’s not a book for those interested in solutions outside of a contemporary policy sphere, but as an in-media-res primer to inequality I think Okun’s experience and foresight into modern issues shines through.
January 3, 2025
Amazing how relevant this book remains. Arthur Okun is a clear thinker who lays out very convincing economic arguments for the trade-offs between equality and efficiency in public policy. He notes his bias (generally favoring more equality, at least in reference to the status-quo of his time) but offers the best arguments for both sides. A really well done and approachable essay that remains relevant 50 years later.
March 25, 2024
I have to own a physical copy.
based on his acknowledgment of his unbashful attitude toward preferences in socioeconomic dynamics (the direction is humane tho, so I respect you very much sir) and kinda of neutral evaluation of the like of polar extremes, his opponents have to label him as objective observer propaganda.
me? I love this book.
based on his acknowledgment of his unbashful attitude toward preferences in socioeconomic dynamics (the direction is humane tho, so I respect you very much sir) and kinda of neutral evaluation of the like of polar extremes, his opponents have to label him as objective observer propaganda.
me? I love this book.
September 9, 2017
This book was originally written in the mid-1970's but could just as easily been written yesterday. Fascinating to read in light of recent political and economic developments.
November 16, 2018
Still relevant after all these years.
May 15, 2021
A Must-Read for any Libertarians! Articulates clearly the trade-offs between Market Economy and the welfare state.
December 30, 2023
The point of view analysis is good. So much research was done 50 years ago, and there is a lot of information mentioned. I will continue to read later.
January 29, 2025
really helpful in understanding how we can seek better outcomes within the current system
December 5, 2010
Great book - extremely well written. All about the boundary between the market and the public sphere. Which transactions should be excluded from markets, such as basic freedoms (the right to survival), votes, etc. We do not want society to turn into a giant "vending machine" where anything and everything is for sale. Okun is a champion for equality, differing from his many conservative colleagues in the economics profession such as Milton Friedmen. At the same time, the efficiencies of the market as an allocative mechanism are not lost on Okun; hence the title of his book. With regards to efficiency, the concept he invokes of the "leaky bucket" is both useful and memorable as a tool for thinking about redistribution from the rich to the poor. The leaks represent both the cost of administering a system of redistribution and, more importantly, the dulling of the incentives that people face knowing a greater share of their income will be subject to taxation.
Perhaps the reason I best liked this book is the bridge it creates between often disparate fields of economics and moral philosophy. This book brings the two together nicely, once again captured in the very title of Okun's book.
Okun makes several policy recommendations, of which my favorite is a broadening of the tax base, to destroy loopholes that were never intended by legislators (such as the use of trusts to skip a generation of estate taxes), and disposing of the preferential lower rates afforded to capital gains and dividends (which Okun reminds us are disproportionately earned by the affluent).
Perhaps the reason I best liked this book is the bridge it creates between often disparate fields of economics and moral philosophy. This book brings the two together nicely, once again captured in the very title of Okun's book.
Okun makes several policy recommendations, of which my favorite is a broadening of the tax base, to destroy loopholes that were never intended by legislators (such as the use of trusts to skip a generation of estate taxes), and disposing of the preferential lower rates afforded to capital gains and dividends (which Okun reminds us are disproportionately earned by the affluent).
August 21, 2015
Very interesting book, written back in the 1970s, and still relevant. While this was written 40 years ago, the challenges between equality and efficiency is one that continues to bedevil us, and has recently returned to to forefront of discussion. Considering this, I think that this book is definitely worth revisiting especially considering the very pragmatic way that Okun approaches the subject. I really liked the way that Okun presented the issue of having to balance social good with economic efficiency. I found his frank discussion appealing, especially with how objective he tried to be showing both the pros and cons of different decisions that each society must make, as well as his own preference of where he would have liked society to have come to.
July 21, 2008
A good theoretical exercise, but the numbers are by now way out of date. The existance of a trade-off between equality and efficiency should be a much bigger part of the debate in economics.
July 9, 2016
A must-read for everyone interested in social sciences. Extremely well-written and to the point on balancing equality and efficiency to reach whatever flavor of policy you prefer.
Displaying 1 - 21 of 21 reviews