Innovation among equals
By Craig Berry and Nick O’Donovan
Although policymakers increasingly recognise the contribution that public investment makes to innovation processes, our understanding of what drives individual innovators remains rudimentary. Many commentators emphasise the role of profit in motivating entrepreneurship, implicitly assuming that egalitarian policies like progressive taxes and redistributive welfare disincentivise innovative activity. But evidence that more equal societies are often more innovative than their peers suggests we need to rethink that relationship. Egalitarian social policy can encourage risk-taking and unlock innovation — under the right circumstances.
With advanced democracies already well into a second decade of post-global financial crisis economic stagnation, the hunt for policy tools that improve productivity and accelerate growth is more urgent than ever. Innovation has a vital role to play in combating burgeoning geopolitical and ecological threats at the global level, as well as shoring up the legitimacy of democratic institutions domestically.
Yet determining how best to incubate innovation is far from easy. We know innovation drives productivity growth, but do we know enough about what drives innovation, so that we might design an effective suite of policy interventions? Our new paper for the UCL Institute for Innovation and Public Purpose (IIPP), ‘Entrepreneurial egalitarianism: how inequality and insecurity stifle innovation, and what we can do about it’, argues that many policymakers might be starting from flawed premises.
The broad field of innovation economics — a major source of ideas for innovation policy today — remains wedded to the notion that entrepreneurs are motivated primarily by potential financial gains, and therefore that inequality is essential for innovation. But the evidence suggests that more equal societies tend to be more innovative than their less equal peers.
Part of the explanation may be that more equal societies tend to have larger governments that spend more on productivity-enhancing research and skills. There is a growing appreciation of the role that the public sector plays in enabling and directing innovation processes, through public investment in ambitious new technologies, anchoring innovation systems, embedding public purpose in innovation policy, and sustaining consumer demand. But equally important is the capacity and motivation to innovate at the individual level — the human roots from which any innovation process must emerge.
To increase the quantity and quality of innovation, we need more people with the ability, resources and incentives to innovate. And there are good reasons to suspect that unequal societies inhibit aspiration and stifle entrepreneurial risk-taking.
The problem of economic insecurity
Economic insecurity lies at the heart of this story. Innovation requires both deep learning and creative thinking. But exposure to unstable and threatening environments can produce stress responses that hamper memory formation and problem-solving. Notably, children growing up in poorer households exhibit higher levels of stress hormones than their more economically secure peers.
The impacts of insecurity and anxiety are not only felt in childhood, nor are they limited to low-income households. Widening inequality can draw parts of the middle class into an increasingly precarious economic position, exhibiting hallmarks of insecurity such as high indebtedness or an inability to meet unexpected additional costs. In more unequal societies, higher- and middle-income households have further to fall, and thus become increasingly preoccupied with avoiding losses rather than making gains — undermining individuals’ willingness to take risks.
Heightened inequality means that fewer people have access to financial resources to invest in innovation — and evidence suggests that personal wealth plays an over-sized role in financing innovation. Social networks become increasingly stratified, further distancing many would-be innovators from private and institutional sources of innovation finance, as well as separating those from poorer backgrounds from role models who might nourish their entrepreneurial aspirations.
Inequality can also depress demand for innovative products. Low-income households struggle to diversify their consumption, meaning an increase in inequality decreases the potential market size for new goods and services. Would-be entrepreneurs based in economically marginalised communities may discover there is insufficient demand in their immediate environment to render new enterprises viable.
What can we do?
If we want to support innovation — or more specifically, individuals’ capacity and willingness to innovate — our analysis points us, perhaps counter-intuitively, to social policy. The importance of social security systems is clear: for innovation’s sake, people must be shielded from financial insecurity, empowering them to learn and create. Even individuals higher up the income distribution need reassurance that the risks associated with innovation are unlikely to prove catastrophic for their careers.
Policies which provide meaningful income guarantees would be one way to achieve this — accessible not only as a last resort when people fall into hardship, but also when taking opportunities to retrain, or starting a business or social enterprise. Public services should be strengthened for similar reasons, with a ‘universal basic services’ (UBS) framework both socialising risks that tend to inhibit innovative activity, and encompassing a set of innovation services. This would widen access to the means of entrepreneurial aspiration, ranging from advice and networking opportunities to finance. Funding these interventions through progressive taxation can further de-risk innovation, closing the gap between the richest and the rest so more affluent risk-takers have less far to fall.
It is vital that we cultivate more diverse lived environments, so that people from different backgrounds are better able to form social networks which may support innovation, and so that demand for innovative new goods and services is more spatially dispersed. This has implications for educational systems, as well as housing and urban planning regimes. Creeping segregation may play a larger role in the UK’s productivity problem than has yet been acknowledged.
In and of itself, there is no guarantee that growth will reduce inequality. Yet progressives continue to champion growth in the hope that it can be made inclusive, whether by redistributing the proceeds after the fact or reconfiguring markets so that they are more likely to produce egalitarian results. But what if social inclusion is actually a prerequisite of economic progress, because of the role that a more equal distribution of resources plays in incubating innovative activity? If our analysis is correct, we need to look beyond science, technology and industrial policy as they are normally conceived, and consider how social policy can support innovation too. We have wasted a generation waiting for growth that will help us fix society; maybe we need to fix society in order to unlock growth.
