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Economists generally believe that societies face a trade-off between efficiency and equality. Arthur Okun famously expressed this view when he compared redistribution from the rich to the poor to carrying money in a “leaky bucket” 1 . The leak, according to Okun and likeminded economists, is caused by the distortionary effects of taxation and the high administrative costs of redistribution. Samuel Bowles’ latest book, The New Economics of Inequality and Redistribution, is chiefly an attack on this widespread view. Bowles argues that it is wrong to view efficiency and equality as competing goals and, moreover, that some redistributive policies will actually improve economic efficiency rather than damage it. Bowles’ central claim is that wealth inequality is costly for a society’s economic prospects; thus, policies aimed at creating a more equal distribution of wealth could, at the same time, also increase economic productivity. Bowles then proposes a specific type of redistributive policy, which he terms "productivity-enhancing asset redistribution", and suggests that it would not only be economically efficient but also politically feasible. Using game-theoretical models and statistical analysis and drawing on new developments in contract theory, Bowles outlines several different ways in which inequality has a negative impact on economic productivity. First, the concentrated ownership of capital breeds principal-agent problems between capitalists and workers; the latter are not the residual claimants of profits, so they have an incentive to put in less effort than would be efficient. Moreover, workers’ shirking creates the need for costly monitoring, which further adds to the efficiency loss. Second, more unequal societies will have a less efficient allocation of funds to investment projects, as more people will be credit-constrained and thus unable to finance their projects even though their rate of return would make them 1Arthur M. Okun, Equality and Efficiency: The Big Tradeoff (Washington, D.C.: The Brookings Institution, 1975).CEU Political Science Journal. Vol. 8, No. 3 375 worthwhile. Third, Bowles finds that, both across U.S. cities and across different countries, economic inequality is significantly and positively correlated with the fraction of workers employed as guard labor. He interprets this as evidence that unequal societies tend to have less secure property rights and, as a consequence, will divert more resources from production to the guarding of property. Bowles does not stop at diagnosing the negative impact of inequality on economic efficiency. His book is intended not only for social science academics but also for political decision makers. Bowles consequently spends a considerable amount of time deriving the policy implications of his findings. He suggests a policy of capital asset redistribution, which, he believes, would mitigate the adverse effects of inequality while at the same time avoiding the incentive problems of the traditional welfare state. Bowles argues that asset redistribution would enhance productivity by making workers the residual claimants of their effort and thus removing the incentives to shirk. Furthermore, he claims that this policy would also ease credit constraints and make efficient investment projects more likely to get funded. Thus, claims Bowles, capital asset redistribution would simultaneously enhance both equality and economic efficiency. The New Economics of Inequality and Redistribution is written in a clear and concise manner. Even though some sections are technical in nature, Bowles’ reasoning is easy to follow. The equations and diagrams are always accompanied by detailed explanations and technical terms are usually defined in advance. Another nice feature of the book is that it not only makes policy prescriptions but also examines whether these are politically feasible. Bowles dedicates three chapters of the book to arguing that, even in a world in which capital is highly mobile and public opinion often opposes redistribution, his policy proposals remain realistic. Despite these strong points, however, the book has significant flaws. Bowles’ treatment of risk incidence under his proposed policy of capital asset redistribution is unsatisfactory. Making workers the residual claimants of a firm’s profits would indeed improve their work incentives, but it would also make them bear the risks from profit volatility. In contrast, under the contractual arrangements prevailing in most firms today, workers receive a fixed wage; this insulates them from the risk due to volatile profits, which is instead born by the owners of capital. If, as Bowles acknowledges, poorer people tend to be more risk averse, then shifting risk from capitalists to comparatively poorer workers will be economically inefficient. The overall effect of asset redistribution will thus be ambiguous: it will improve worker’ incentives and ease credit constraints, but it will also lead to a less efficient risk incidence. This illustrates a more general shortcoming of Bowles’ method. Throughout the book, Bowles is satisfied with merely showing that effects exist and does notBook Reviews 376 attempt to estimate the magnitude of these effects. Thus, when one variable affects another through both positive and negative channels, the net effect will be impossible to predict. This would not be a problem if Bowles merely concluded that capital asset redistribution could increase economic efficiency, depending on how its various effects balance out. His conclusion, however, is much stronger: he argues that asset redistribution will have a definite positive effect on efficiency. Such a conclusion is unwarranted and would require quantitative estimates of the impact that asset redistribution might have on risk incidence, work effort, and credit constraints. In the end, Bowles does not marshal enough evidence to convince us that the equality-efficiency tradeoff is not real. True, he does prove that the tradeoff might not hold under some conditions, but it is unclear whether this applies to contemporary societies. The usefulness of Bowles’ book as a policy guide is thus questionable. Just as efficient market models do not imply that real existing markets never fail, Bowles’ efficient redistribution model does not imply that real redistributive policies will not have efficiency costs. Of course, this does not mean that societies should never engage in redistribution, just as the existence of market failures does not mean that societies should not use markets to allocate resources. What this does mean, however, is that redistributive policies should be tailored to particular contexts and should always take into account possible efficiency losses. As a scholarly work, The New Economics of Inequality and Redistribution raises important questions about the economic consequence of wealth inequality and suggests some intriguing answers. It is thus recommended for academics and even laymen interested in the subject of economic inequality. As a guide for policy, however, the book leaves much to be desired.