Thursday, January 23, 2014

Innovation and Inequality: cause, effect or both?

I see that Matthew Yglesias, the economics and business writer at Slate, has linked the future of innovation to rising inequality. His premise is that innovation is threatened by rising inequality - that is, there won't be a large market for new innovations because as inequality grows, there will be fewer and fewer people able to afford the new innovations.  His article is absolutely correct, if you assume that all innovation results in more expensive products than what was previously available.  A more nuanced article would note that innovation is both a cause of inequality, and a solution to inequality.

Creative Destruction

Yes, you read that correctly.  Much innovation is a cause for inequality.  In a capitalist market, good ideas and excellent new products and solutions attract customers.  This means that the creators of those products and services, the innovators, reap outsized rewards.  Thus, being an innovator, leveraging innovation to create products and services that people demand, can increase your personal or corporate wealth.  Innovators will diverge from non-innovators who aren't creating new and valuable solutions.  There's really nothing new in this analysis.  People with great ideas and the ability to commercialize them and create compelling products have always had the opportunity to gain an inordinate share of the income, and thus create wealth.  It is this wealth that creates a growing divide between the "haves" and "have nots".  In fact Yglesias fails to make a distinction between rising incomes and dynastic wealth.  There are plenty of people - Steve Jobs was one - who started with very modest means, leveraged innovation to create new products that people wanted, and created wealth for himself, his company and his stockholders.  Contrast this with people who inherit wealth, who create little but are comfortably wealthy and also part of the "inequality" gap.  Who should we ask people to emulate?

After all, Schumpeter noted that the capitalist model and innovation in particular would follow a path of creative destruction, creating "winners" and "losers", and that model has held for generations.  What's interesting about the specific time we live in is that as markets have consolidated and technology platforms have become more universal and selling costs have fallen, it's easier to get rich more quickly than ever at levels unimaginable even a generation ago.  Is Twitter really worth a billion dollars?  Who knows.  But the team that built it came from modest means and are now wealthy based on their innovation.

Also an enabler

But innovation isn't just a cause of inequality, it is also a bridge.  Innovation doesn't always create more expensive products - often innovation creates better products at less cost that deliver more value.  Thus, innovation creates a better standard of living for everyone.  Yes, those on the top rise far faster than those at the bottom, but innovation in food, healthcare, housing and a range of other industries is improving lives not only in the US but around the world.  Just ask Bill Gates, who is convinced that poverty will be wiped out in the next 20 years.  I'm not as sold on his ideas as he is, but you get the point.

Further, innovation is a bridge to reduce inequality because any one with a good idea can cross the bridge.  Innovation isn't limited to a select few, like inherited nobility, but is available to anyone, anywhere.  People with good ideas and the desire to start something new create new businesses and new products every day.  What Yglesias should be focused on is how to create a more entrepreneurial and innovative mindset in every sector of society, leveraging innovation as a tool for everyone, rather than blaming innovation for the existing gap or warning that future innovation will falter because of the growing income gap.  Apple presents the counterpoint to Yglesias' warnings by the way.

While Apple continues to produce expensive and innovative phones, as does it's competitors, the adoption rate of "smartphones" is high in all sectors of society.  There's really little distinction between the wealthy and the poor in terms of cell phone adoption and use.  What Yglesias identifies as a potential gap for innovation is for luxury goods that can't tap into a larger market.  Yes, the top end of the market is getting richer, and perhaps more isolated from the rest of us, but they don't care about the cost of things.  They care about newness, design, originality.  Innovators will serve that market, and will also serve the "long tail" market as well.  The beauty of innovation is that it can serve them both.

To give Yglesias his due, he did describe perhaps the biggest counterfactual to his article, the strange fact that many excellent innovations came out of the Depression.  Perhaps it was the fact that the US consumers simply demanded more after years of hardship, but plenty of innovations were delivered during and after the Great Depression, at a time when you'd think innovation would be completely halted, since so few people could afford anything. 

Cause and Effect

Innovation is both a cause of inequality - because wealth flows to people with great ideas and solution to inequality, because innovation causes a rising standard of living for everyone, and the possibility that anyone can gain access to greater incomes and wealth.   Rather than point the finger at innovation, we should consider how to increase innovation and entrepreneurship in this country and everywhere that poverty exists.

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posted by Jeffrey Phillips at 8:57 AM


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