This post is a continuation of the 'war of position' against the neoclassical/neoliberal ideology that still retains a lot, but certainly declining, sway among the general public. One of the most important arguments they have to retain capitalist power relations is through the defense of the indefensible: very high inequality is a sure means to boost economic growth and therefore is a ethical thing to do. They argue that having egalitarian distributions of income inevitability leads to lower growth since economic agents would not be sufficiently rewarded for the efforts they put in and lower economic growth leads to lower standards of living for everyone. While, in countries that have higher levels of inequality, rewards more "productive" people and therefore have more innovation and are more dynamic. Therefore, via the notion that a 'rising tide lifts all boats', they are normatively unconcerned with inequality, because as long as there is a pareto optimal outcome, things are just--something to be criticized later.
However, as per usual, the facts aren't in favour of this 'idealist absurdity'. As usual, Sweden disproves the entire neoclassical paradigm; if any country on earth would be on the "Road to Serfdom", it would be Sweden. Throughout the Cold War and beyond, Sweden had the world's most egalitarian distribution of income; so egalitarian that Sweden was more egalitarian than the USSR:
Thus, does Sweden have an utterly uncompetitive economy with a fascist/socialist--since they are the same thing in a Hayekian framework--dictatorship? No, Sweden is internationally recognized as not only one of the most open liberal democracies in the world, but it is also a country where the population leads amongst the best lives in the world, measured by the HDI. Thirdly, Sweden has a per capita income of $52,180 ($37,333 PPP), while Britain, which engaged in radical neoliberal reform has a per capita income of $43,733 ($36,357 PPP) in 2008. Finally, its exports as a percentage of GDP is also higher, suggesting a much more competitive economy. Importantly, it also has a more innovative economy than those with higher rates of inequality, according to The Spirit Level:
Rather than stimulating innovation and progress, great inequality wastes the talents of a large proportion of the population. The evidence shows that it reduces children’s educational performance as well as reducing social mobility. Economic studies of the relationship between the extent of inequality and economic growth rates have mixed results: most suggest that greater equality is beneficial to growth but a few suggest the opposite...There is a weak but statistically significant tendency for more equal societies to gain more patents per head than less equal ones. (http://www.equalitytrust.org.uk/why/ evidence/frequently-asked-questions#innovation)
I realize that the economy does not determine all, something that eludes the neoliberals. Reasons why country a does not grow, or descends into a dictatorship is due a overdetermination of causes that cannot be easily reduced to the economic problematic. As Althusser states:
If, as in this situation, a vast accumulation of ‘contradictions’ come into play in the same court, some of which are radically heterogeneous—of different origins, different sense, different levels and points of application—but which nevertheless ‘group themselves’ into a ruptural unity, we can no longer talk of the sole, unique power of the general ‘contradiction’ [the economy]
Hayek's rather simplistic and wrong thesis needs to expunged from the social body in order to bring a more just society (http://perspectivos.blogspot.com/2009/12/on-hayek-part-i.html). On Pareto optimality, because it deals only with absolute measures it is certainly a normatively inappropriate means to determine what is ethically and even economically sensible. As Tony Smith states:
Critics of neoliberalism also note that the very notion of Pareto optimality is deeply flawed from a normative standpoint with respect to distributional issues. A society in which a small handful of individuals appropriates almost all the income and wealth of a society, leaving the vast majority in hopeless poverty, can count as ‘optimal’ according to this notion.