Key Perspectives - ESOP
Countries with low inequality – like the Nordic countries -- seem to violate what the economics profession views as necessary requirements for an economy to prosper. They have too small wage differences, too high taxes, too large public sectors, too generous welfare states, and too strong unions. Despite of these violations, they have for decades been doing well. What most economists see as a recipe for serious economic trouble seems, in the Nordic countries, to be consistent with high growth, low unemployment, low inequality, and a fairly efficient allocation of resources. How come?
Has economics got it right? Or, do economics fail to understood the causes and consequences of inequality? The research center ESOP explores these issues in depth. The ambitions are:
- to confront economic theory with the lessons from countries with low inequality: Do we need to change the basic behavioral and institutional assumptions to understand their performance?
- to understand the linkages between economic performance, distribution, and social disparities: What are the costs and benefits of more equality?
- to explore the sustainability of generous welfare states and the viability of egalitarian market economies: What determine their performance and their economic and political feasibility?
- to understand the interaction between policies, institutions and long term development: What set of policies and institutions may generate an egalitarian development path within a consistent arrangement?
- to bring these research topics to the international research frontier: What are the general lessons for economics?
Skeptics have from the beginning doubted the long-run feasibility of obtaining more equality in a market based system of capitalist ownership. In 1899 Rosa Luxemburg characterized reform efforts as "a sort of a labor of Sisyphus" in which partial victories would be continually eroded by market forces. More recently, conservative critics, such as Erik Lundberg, have made the reverse argument that market forces are steadily eroded by social reform with bad consequences for economic performance.
Neither view is proven correct. Social equality and worker security have persisted in the Nordic countries and economic growth has been at par with the US. In the US rising inequality has gone hand in hand with social cleavages and lower welfare for at least one third of the population. In contrast most of Europe has experienced only modest rise in inequality, but a sharp rise in unemployment. The Nordic countries, however, have in the same period combined social equality with good macroeconomic performance and full employment. This experience seems to negate the commonly presumed trade-off between inequality and unemployment.
To follow these ambitions we combine traditional approaches in labor economics and macroeconomics with new developments in economics and social science. In addition to drawing on modern political economy, institutional economics, and behavioral economics we broaden the scope of economics by incorporating a wider range of social factors.
The methodology in economics is well suited to incorporate social factors. "General equilibrium", a dominant paradigm in economics, emphasizes the importance of feed-back mechanisms and consistency. But the framework is usually limited to the market mechanism. The wide interconnections between the economic, social, and political forces should be captured within similar frameworks.
Take wage bargaining and welfare-spending. Wage coordination in the labor market normally reduces wage differences. This wage compression may again imply political support for higher welfare spending. The generosity of the welfare state strengthens weak groups in the labor market implying that the lowest wages go up and the wage scale is compressed even further.
Similarly, as the woman joined her husband as wage laborer the household naturally demanded more public care for children and the elderly. The gradual expansion of the welfare state made it easier for yet more women to enter the workforce.
These are examples of how certain policies, institutions and behaviors fit together and strengthen each other. In the long run, the outcomes may look as if societal arrangements come in packages with different social and economic organization. We believe that there is no universal relationship between equality and economic performance. Under some institutional arrangements, equality and prosperity go together and reinforce each other. Under other institutional arrangements, however, this is not the case. A more narrow economic approach, that neglects institutional complementarities and social spillovers, does not capture such mechanisms and may easily misinterpret the Nordic experience.
In all countries - rich and poor - there are important interlinkages between equality, social organization, and economic performance. Can equality and welfare state arrangements be introduced in all types of societies? Or, are they only feasible in consensual, homogeneous and affluent societies with an extraordinary commitment to equality? Such questions are of general interest in order to suggest feasible development strategies.