Is inequality the price of progress?

Is inequality a necessary trade-off for innovations that advance society? More balanced policies are possible if we can move the debate beyond polarised opinions, say the authors of Innovation + Equality

Some people argue that inequality is the price we must pay for innovation. They say that we can’t all be billionaires. They assert that if we try to make society more equal by raising the top tax rate, it could deter risk taking and innovation. If we have to choose between having more stuff and distributing it fairly, they conclude that we should go for growth over equity. But, is this is a false trade-off?

Perhaps we can’t all be billionaires, but there’s no reason to be sanguine about rising inequality and falling mobility. There are many ways that society can improve innovation and equality. This means we can have a bigger cake and slice it up more fairly. Indeed, when we overlook these ideas, we miss the chance to make society more entrepreneurial and more egalitarian.

Wealth in the US is becoming concentrated into fewer and fewer hands. In the mid-1980s, the bottom 90% of households controlled four times as much wealth as the top 0.1%. Today, the two groups have the same shares. This means that in a population of slightly over 300 million, the top 300,000 or so have as much wealth as the bottom 270 million. It’s a case of the ‘haves’ vs. the ‘have yachts’.

Rationalising the growing gap

In Innovation + Equality (MIT Press, 2019) the focus is on how to maximise the upside and minimise the downside of technology. Just as technologies of the past have improved our lives, so too can the innovations to come. But we’re also painfully aware of the risk that technology drives a wedge through our society. In a world where robots can do everything and wages fall to zero, the only thing that matters is who owns the assets. That’s a scary prospect for the one in five people whose wealth is already approximately zero. Even in more moderate scenarios, it’s likely that the earnings gap between university graduates and high school dropouts will continue to widen. That should be worrying for every teenager today who’s considering not finishing school.

The big question is whether a growing gap between rich and poor is the price of progress. If we want to generate technological advances and innovations that improve productivity, must we accept that there will be some who end up with a larger share of those fruits? Is there a trade-off between innovation and equality?

Many in business and government say that inequality is merely the price that society pays to enter into a more exciting world. They rationalise this position by saying that the focus should not be on inequality per se, or ‘who gets more than me?’, but on progress—i.e. ‘am I better off than I was before?’ Innovations are seen as things that make everyone better off even if the gains differ. Yet in reality, ‘no losers’ innovations are rare. Electronic supermarket checkout machines displace cashiers today just as steel mills displaced blacksmiths a century ago. Even as they raise average levels of wellbeing, most inventions make some people worse off.

Moving away from the fringes

Economists are also concerned about incentives. Innovations do not come for free. Someone must devote effort and resources to bring new ideas to market. Not surprisingly, they will only do so if they expect to be paid back. Adjusting for risk, some profit is due to them. So, when we look back, we will get innovations, but we are also likely to see inequality. The fruits of progress are unequally shared. Seen in this light, extremely high top tax rates might impair innovation.

In the final two years of the Second World War, the US had a top tax rate of 94% on incomes over $200,000 USD. For every additional dollar above that threshold, the taxpayer kept just six cents. In that environment, some entrepreneurs might hesitate. Push all tax rates up to 100% – the approach favoured under pure communism – and the link between risk and reward is broken entirely. The result, as societies from Mao Zedong’s China to Fidel Castro’s Cuba have shown, is more equality but less innovation. In the end, everyone is worse off.

The problem with many contemporary debates over innovation and equality is that these extreme positions – innovation benefits everyone vs. equality hurts everyone – have come to dominate the discussion. But once we move away from the fringes, we find many policies that do not imply a trade-off.

Once you examine the details of technological innovation and its impacts, there are a plethora of good policies that allow both more innovation and less inequality. Good policies are those that respect two fundamental facts about the process of innovation: creative destruction and unresolvable uncertainty.

Creative destruction means that technological change comes at a cost, and this cost should be shared by those who receive the benefits. Unresolvable uncertainty means that policies should not be overly rigid and sector specific. Instead, we should think in insurance terms: how do we stimulate innovation while providing a buffer for those who disproportionately bear innovation’s costs? In other words, how do we make redistribution smart?

From ‘permissionless’ innovation to generalist education, an insurance approach can help ensure we have more innovation and more equality. The ‘insurance policies’ that society might take out might also bring us closer to the exciting age imagined by Star Trek than the corrupted future threatened by Terminator.

This is an edited excerpt from Innovation + Equality: How to Create a Future That Is More Star Trek Than Terminator (MIT Press, 2019) by Joshua Gans and Andrew Leigh.

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