Equality and Efficiency

We have now established that it is important to try and achieve a distribution of income that is considered fair by the majority of people who live in a society.  Some may conclude that the best way to achieve this outcome is to divide all of the income that is earned equally amongst all of the members of the society.  Although this vastly over-simplifies his work, Karl Marx was a proponent of very high levels of equality, and it is from his research that communist ideals were developed.  There is, however, a significant problem associated with this conclusion – as the level of equality is increased, we may find that there is a corresponding decrease in the level of efficiency.  An example will help to make this clear.

Imagine that you lived in a society that believed everyone should receive the same level of income.  Regardless of whether you were a lawyer, a doctor, a train driver or even a person who was unemployed, you would still receive a very similar income to everyone else.  How would you react?

History tells us that people very quickly begin to resent those who do not make a contribution to society that is considered “worthy”.  Others find that they can reduce their output and maintain their income.  In fact, if your wage will remain relatively unchanged, then it follows that working less will actually increase your standard of living.  In other words, too much equality actually reduces the incentive for a person to work hard.  Over time, countries that administered these policies found that total output (and therefore total income levels) fell.  This meant that the total pool of income that was available to share between all of the people in the population was smaller, and so living standards fell.  It is for this reason that there was such as large difference between living standards in eastern Europe (which was largely communist) and western Europe (which was predominantly capitalist) when the iron curtain finally fell.  Even today the former communist states are struggling to catch up to their western counterparts.

Now let’s reverse the situation.  If you work in a business that has a clear structure, you may be aware that people in management positions will earn a higher income than those who form the bulk of the workforce.  Generally they will also be required to work harder, take on more risks, or use a higher degree of skill.  Doctors, nurses and surgeons all work in the medical profession, but it is surgeons who earn the most money because the work that they do is extremely difficult.  (This statement is certainly not meant to understate the extraordinarily difficult work that is done by doctors and nurses!)

If this society was perfectly equitable there would be no incentive for an employee to take on the more dangerous or more technical jobs.  This might increase their workload, but it would not add to their income.  On the other hand, in a capitalist society (like Australia) some people might find that they are willing to do the extra work that is required because they believe that they will gain a fair return for their efforts.  Think of your school – some people act as teachers, while others may work to become a deputy principal or a principal.  These positions require a person to work for longer hours, and to make more challenging decisions.  If there was no reward for doing this then over time we would struggle to find people willing to administer our schools.

It is apparent, however, that there is a cost associated with the decision to organise the economy in this way.  Those who are willing to work harder, to extend their education, to do a job that few other people are willing to do or (in some cases) are just lucky will receive an income that is higher than others in society.  While our overall level of efficiency will increase, our society will be more inequitable.