MATTHEW YGLESIAS had an excellent piece at Vox on Monday pointing out a fundamental shift that has taken place over the past few years in our understanding of the economics of inequality. He begins by considering an "everything-you-need-to-know-about-economics" graduation speech by Thomas Sargent, a Nobel prize-winning economist, which included the line, "there are tradeoffs between equality and efficiency". But Mr Yglesias notes that this statement is no longer a truism. We used to believe that trying to make an economy more egalitarian, while perhaps ethically pleasing, would lead to slower growth. But in the aftermath of Thomas Piketty's new book "Capital in the 21st Century", recent papers by economists at the IMF and a flood of research into the economic effects of inequality, it seems this assumption is either unsubstantiated or just plain wrong. As Mr Yglesias puts it,

There really are tradeoffs between equality and efficiency. But there is no sound basis for believing in a tradeoff between an equitable distribution of income and the creation of a society that is efficient in generating the material basis of prosperity. If anything it is the opposite. The present highly inegalitarian distribution of economic resources is highly inefficient and makes it inordinately difficult to solve serious problems.

I'm not going to rehash Mr Yglesias's exposition of the research on this topic; you should just read his post. You may also want to take a look at an IMF paper he cites, an exhaustive review of data on the growth effects of inequality and redistribution by Jonathan Ostry, Andrew Berg and Charalambos Tsangarides. Their overall conclusion is that greater inequality in society strongly retards economic growth, while redistribution is "largely benign", with only very extreme redistribution programmes having some negative effect. Since greater equality is so beneficial, the net effect of redistribution on growth tends to be positive. But rather than get any deeper into the economic argument, I want to talk about the political implications.

The assumption of a trade-off between egalitarian distribution of resources and economic growth has been one of the dominant paradigms of American political thought since the cold war. The moral justification for capitalism employed in the contest against Soviet Marxism was that while the socialist state economy might create greater equality and provide basic necessities for all, competitive capitalist economies would generate so much more growth that the added resources would end up providing even the poor with a higher standard of living than they would enjoy under socialism (through limited government redistribution, if necessary). One can see these assumptions in operation, for example, in George Kennan's startlingly prescient 1946 telegramme describing Soviet aims and intentions, where he notes that the Soviet Union is bent most of all on destroying European moderate socialists, and points to the "success of [the moderate socialists'] efforts to improve conditions for [the] working population whenever, as in Scandinavia, they have been given [a] chance to show what they could do." From the very inception of the cold war, at least among believers in the power of free markets, the vision was that social-welfare programmes in the liberal democracies would ameliorate the hardship of the working class and forestall political unrest while capitalism drove growth forward.

The idea of that equality-efficiency tradeoff is also central to the most important liberal vision of political ethics in the postwar period, John Rawls's 1971 "Theory of Justice". In Rawls's framework, social rules are justified when they are chosen from behind a "veil of ignorance"; when people don't know what role in the resulting social order they will be assigned to. In such a framework, Rawls argued, unequal distribution of resources is defensible only if it is beneficial to even the worst-off individual in society. This idea, which came to be known as the "difference principle", was endlessly hashed over in thousands of undergraduate debates over trickle-down economics and the viability of kibbutzes, but it really took hold through the 1970s and '80s as it became clear that even the poorest residents of the liberal capitalist democracies had come to enjoy a higher standard of living than most citizens of the Soviet bloc.

The difference principle was in part Rawls's response to the ethical difficulties of modelling economic choices. It could be possible in theory for economic choices to increase average utility while severely harming the least fortunate; that would clearly be ethically perverse, and Rawls thought that the difference principle would avoid the problem. But the thing about the difference principle is that it assumes a tradeoff between economic growth and egalitarian distribution of resources. Without such a tradeoff, the thesis is simply uninteresting; if a more unequal society fails even to deliver more overall growth, there is no dilemma to be solved.

What Mr Piketty and his fellow equality-modellers are saying is that, with Soviet-style state socialism having departed the scene, the supposed tradeoff between growth and egalitarian distribution may no longer describe anything important about the world. We can see the rhetoric living on, in debates over Obamacare, long-term unemployment insurance, the minimum wage and so forth, but it's not clear that it means anything. Greater equality seems to be simply good for growth. Once the effects of that shift in economic thinking filter into political discourse, we'll know the cold war is finally dead.

(Photo credit: AFP)