Understanding why inequality is an impediment to innovation
By Craig Berry
Most economists would say that innovation happens when people (more precisely, firms) identify an opportunity to increase market share, and therefore profits, by providing a better product, or producing the same products more efficiently (or a bit of both). But plenty of people and firms make money without innovating. Most innovations fail, to some extent, meaning the financial benefits never materialise.
And innovation in the real world depends on supportive institutions, layers of existing technologies and scientific knowledge, and pathways to implementation paved with the tacit know-how of countless other people. Few organisations can control all of these moving parts, all of the time. So why bother to try?
In reality, innovation has a not-so-secret ingredient. It has rightly become commonplace to argue that much of what we think of as innovation, especially in ICT, is actually driven by the state’s willingness to take the risks involved in early-stage tech development, because it is incentivised by a pressing societal challenge (national defence, healthcare, climate change, etc.).
But this perhaps tells us that there are fewer genuine innovators in the private sector than we thought. We can therefore ask the question another way: what’s stopping us innovating?
That wealth accumulation drives innovation remains a foundational idea of modern economics. Yet this would imply that the absence of wealth drives people to become innovative. The opposite is obviously more true: most of what we think of as innovation is undertaken by the already-wealthy, and an absence of wealth is impediment to innovation for many people.
Wealth and innovation
In The Power of Creative Destruction, Philippe Aghion, Céline Antonin and Simon Bunel generally extol the virtue of wealth-driven innovation, laying claim to the legacy of Joseph Schumpeter’s treatise on capitalism’s inherent innovativeness.
The book is meticulously evidence-based, for the most part, but its valorisation of wealth accumulation leads to some questionable conclusions. For example, the authors advocate a UK-style system of R&D tax reliefs for France, even though French economy is already more productive than the UK’s.
The question of whether innovative economic activity should be tax-privileged is really a bigger question about what makes genuine innovation tick. Are we really so sure that it was capitalism — an economic system which allowed more people to accumulate wealth — which triggered a tidal wave of innovation in the eighteenth and nineteenth centuries? Or was it instead the spread of a critical mass of technologies throughout the West at the time? If the latter is true, capitalism in its pure form would be rendered a way of ordering the distribution of innovation’s benefits, rather than the genesis of these benefits.
We should of course probably think of the technological and economic spheres as developing in tandem — an understanding which would bring us to Carlota Perez’s alternative perspective on Schumpeterian economics. Furthermore, there are warnings in Perez’s work on financial bubbles of precisely what happens when wealth-seeking advances unabated, even if founded ostensibly upon technological innovation.
“Innovation happens outside the market: in all organisations, in the public as well as private sector”
I think there are four important consequences of accepting a simplistic version of the wealth/innovation relationship. First, as implied above, we struggle to distinguish between good capitalism and bad capitalism, allowing too much of the latter to get by while we figure it out (as Aghion himself has argued in relation to big tech ‘mega-companies’). Second, because most state institutions do not accumulate private wealth, we struggle to justify the absolutely essential role of the public sector in innovation processes, rendering state actors little more than supportive cheerleaders rather than a driving force.
Third, and related to this, we obscure the fact most forms of innovation are not about financial returns at all in any direct sense. Innovation happens outside the market: in all organisations, in the public as well as private sector, and indeed in everyday life. Similarly, one of the main ingredients of technological innovation as we conventionally understand it — scientific discovery — obviously does not reward its protagonists in the way (or at the level) we might expect a capitalist system to do so.
The inequality impediment
The fourth consequence is the one which receives least attention in economics-centred innovation studies: the risk of valorising and reproducing inequality.
One of the most interesting parts of The Power of Creative Destruction is the presentation of evidence that the best indicator of whether a person is going to become ‘an inventor’ is their parents’ income. In short, higher income correlates with a higher likelihood of innovating (although note that invention is part of but not necessarily synonymous with innovation in a broader sense).
The parental income finding applies to the United States, where educational standards are poor for many children, and also Finland, where almost all children receive a good education. As such, it is not simply about richer kids getting a better education: higher parental income means children are more likely to benefit from whatever education they do receive.
In my view, understanding why this is the case is at the heart of understanding what makes innovation happen, especially given that this trend is not only, or even largely, about quality of education.
One rather depressing explanation would be that richer parents are more likely to have social connections that their children draw upon in their careers, making them more likely to end up in the kind of jobs that involve innovating (or to have the choice to do this kind of job, if they are so inclined). But while this factor has some relevance, it is an unsatisfactory answer. Although many high-paying jobs involve innovation, in a narrow sense, most do not.
A more plausible explanation is that financial security encourages people to take risks with their career (e.g. leaving a steady job for an innovative start-up), essentially by taking some of the risk away. Behavioural economics teaches us that people worry more about potential losses than potential gains, so the prospect of hardship is given more weight than the prospect of greater affluence.
This is borne out in the real world. We know that more equal countries tend to be more innovative economies. The main exception is the United States, which is both unequal and innovative. But it should be seen as the exception that proves the rule, aided by macroeconomic privileges arising from financial hegemony which no other economy enjoys, and encompassing just enough people with very high incomes to breed innovators.
As I hinted above, I think the finding also has something to do with our ability to benefit from education. An upbringing founded upon financial security enhances our ability to learn. We are healthier, and we can take for granted resources and infrastructures that facilitate development. We use more ICT. We travel more, and experience a wider array of cultural goods. It is about our ability to be fully present in learning moments, learning more effectively as we consciously contribute and engage with educational activities, with the space and confidence to be creative.
We are therefore not thinking enough about the material conditions that allow us to engage in relational learning and self-actualisation. And there is no reason to assume that these effects of higher income apply only in childhood and adolescence. We have built economies which seem intent on depriving people of opportunities to be inquisitive and creative throughout their lives. We know this is bad for individuals. It should be obvious that it is bad for society as a whole too, and the economy insofar as it inhibits our capacity for innovation.
Incubating innovation
Realistically, we are not all going to be innovators in the conventional sense, and certainly not inventors. But this does not mean we cannot contribute productively to innovation processes in a systemic sense.
I think we can take inspiration from initiatives such as the Joseph Rowntree Foundation’s Minimum Income Standard, which establishes the income required to live with dignity as a participating member of society. In short, consideration of the resources individuals (and communities) need to develop their innovative capacities should become a central concern of innovation policy, with interventions across a range of policy areas geared towards delivering the necessary conditions.
This will inevitably point us towards a more equal distribution of resources, but it would be egalitarianism with a clear economic rationale. The UK, for instance, can continue to try to ape the United States if it likes — indeed a caricatured version of what makes the American economy innovative — but other developmental paths are available.
Yet we must not assume however that any benchmark for supporting innovative capacities is only about the distribution of financial resources. While instructive, we should be cautious in interpreting the evidence that higher incomes alone breed innovation. It is not all about the money, rather the things that money can buy. And there are plenty of things that money cannot buy: the approach I outline here would involve decommodifying certain goods so that they are (more) universally available.
The provision of education and training will be paramount. But we also need to ensure people have sufficient financial resources to live well, adequate physical and digital infrastructures, and access to public services to support health and mobility. Our access to culture should be prioritised too. Moreover, we should acknowledge the capacity-generating effects of free time: the evidence that working less allows us to work better is mounting.
This is not to suggest that establishing the right mix of policies, financing, and institutions to support innovation does not matter. Ultimately there is nothing wrong with seeking to fine-tune tax arrangement to encourage some parts of the innovation processes. But in general we need to be thinking about how to build the foundations of an innovative economy, rather than how to reward innovators.
In assuming that wealth drives the innovations that really count, we marginalise the innovations that are developed beyond the market. We too easily assume that the everyday application of curiosity and ingenuity — with little direct prospect of financial reward — is marginal to creative destruction. I would argue that it is what’s missing, not least because wealth-driven innovation has encroached upon the non-market domains where experimentation flourishes.
