So I see my policy goal as something which, while elusive and unattainable, serves as a beacon or “light on the hill” and which governments can strive towards over time, using “evidence based” analysis to implement only those tried and tested programs which can meet the standard tests in terms of social efficacy and economic returns. It means, as Andrew Leigh reminds us regularly, looking not only at inter-temporal and cross country studies but also at randomised policy trials.

Perhaps this is what Rudd and Gillard intend – if one believes their rhetoric.

I doubt that innovation per se is significantly affected by taxation/inequality, but innovation isn’t much use if it doesn’t get brought to market, and, for instance, high corporate taxes will certainly tend to discourage enterpreneurs from turning new innovations into commercial products.

If Australia suffers from a lack of patentable innovations, it’s possibly due to the degree we rely on farming and mining for our economy. But there’s also something of a long-standing difficulty in Australia with attracting funding for innovative ideas, which must discourage a number of would-be innovators from bothering to patent their ideas. If tax breaks can assist in encouraging those with cash to put it behind new ideas, I’m all for them.

Maybe, if all the bright brains were not distracted by American dollars, similar technological advances could/would have been achieved in the Nordic oasis of white tranquillity.

Patrick - Billionaires might be rare in the Nordic countries but technological advances seem to be more common than in Australia. Compare Sweden’s performance with Australia’s on the ‘Number of US patents per million population’ (pdf) or its ranking on innovation in the Global Competitiveness Report.

What relationship do you think there is between income inequality, taxation and innovation? What does the data say?

It’s times like this you need Andrew Leigh!

As it is, I think there are good reasons for not wanting Australia to become a high-taxing/big-spending nation like the Nordic states. After all, under Howard, goverment spending grew from something like 22% of GDP to over 30%, and for what? There’s been no noticeable improvement in public services in that time. For whatever reason, Australia doesn’t seem mature enough as a nation to leave that much of our GDP in the hands of politicans driven by populist demands as much as anything.

BTW, out of…

Society A) Bottom 1% earn an average of $5000, top 1% earn an average of $500000
and, with an average GDP of $60K
Society B) Bottom 1% earn an average of $10000, top 1% earn an average of $300000, with an average GDP of $50K

Which society do you think is “better off”?

people appear to think not so much that those on low incomes are underpaid, but that those on higher incomes are very overpaid.

This is the point, isn’t it? Public morality should be concerned, as are the people you quote, with the least well off. But in fact so much time and effort is wasted on the best off!!

I simply can’t see how any man or woman’s super-riches diminish my modest wealth (using ‘wealth’ rather relatively).

I’ll just point out that billionaires are very very rare in Northern European/Nordic countries - the founder of Ikea lives in Switzerland. Maybe those countries are in part free-riders on America’s inequality. Maybe, if all the bright brains were not distracted by American dollars, similar technological advances could/would have been achieved in the Nordic oasis of white tranquillity.

But no-one believes that last hypothesis.

Denmark spends about 50 percent of its GDP on public outlays and has the world’s second-highest tax rate, after Sweden; strong trade unions; and one of the world’s most equal income distributions.

Obviously high taxes and a generous welfare state don’t mean the end of civilization as we know it.

My point isn’t that taxes need to be low, it’s that government can’t create a system that aligns rewards with talent and effort. I think Hayek’s right. If you made a serious effort to do that you’d destroy the economy.

As for opinion polls, one area of concern seems to be high income earners. A recent UK study reported that “people appear to think not so much that those on low incomes are underpaid, but that those on higher incomes are very overpaid.” (pdf)

I don’t think a society that rewards “effort” alone would even be possible - and obviously it would be silly to pay someone who put enormous amounts of effort into producing things that nobody wants more than someone who worked out how to produce things that were wanted for minimal effort. But it does seem there’s widespread acceptance that, for instance, nurses and teachers are largely underpaid, while many lawyers, sports players, and CEOs are often paid more than their contribution to society would seem to justify. On the other hand, while this is how people might answer in opinion polls, they don’t seem to feel strongly enough about it to be attracted to vote for governments promising ‘fairer’ salaries.

I think Sen’s ideas on capabilities is an important advance on Rawls’ idea of primary goods. And it’s a huge improvement on egalitarian theories that focus entirely on income.

I remember when I asked you about what you meant by ’substantive equality of opportunity’ (SEOP) you said that it:

… describes a situation where people with the same innate capacities have an equal chance to achieve their potential to the full over their lifetimes. This requires governments to try to overcome risk factors and handicaps in early childhood and teenage years.

Elsewhere you’ve written that the policy goal is to ensure that “excessive market inequality - inequality that cannot be explained and justified in terms of differences in effort and talent - is kept to a minimum.”

You reject the ideal of a society that rewards effort alone. I think you’re right to do this. This is Bellamy’s vision, and any attempt to turn it into reality it would destroy both freedom and prosperity.

And I think you’re right to talk about enabling people to develop their potential. Many people seem to think egalitarianism is about crippling the talented.

But there are two aspects of SEOP that worry me. The first is attempting to minimize “inequality that cannot be explained and justified in terms of differences in effort and talent”.

It seems to me that a lot of the differences in income and wealth in a market society are due to chance. The reason entrepreneurs can earn such high returns is because of the amount of risk they have to carry. I wouldn’t want to discourage entrepreneurship. I think this could undermine prosperity and, in the end, damage the prospects of the least advantaged.

The second aspect is about how far you go to overcome handicaps. If SEOP requires such high levels of expenditure on the most disadvantaged that it stifles the economy and makes even the least advantaged worse off, then it seems as if we ought to trade off some equality of opportunity in order to raise the prospects of the worst off.

I look for a principle of redistribution that has a strong moral basis and is capable of policy application - yet can also make the economic cake bigger.

So I go back to my “substantive equality of opportunity” principle - a version of Sen’s principle of “maximising the capabilities of people”. It has clear practical policy implications (unless you believe governments stuff everything up); it is a good moral foundation for redistribution (subject to a decent safety net); and it makes the economic cake bigger in the long term.