Ten Ideas to Boost Innovation + Equality

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Gans, Joshua and Leigh, Andrew (2019). Innovation + Equality. The MIT Press.

Does innovation require inequality?

The average worker, in order to earn the annual income of a CEO, would have to work:

• back in the mid-1960s - 20 years (0.9 million USD);
• today - around 312 years (18.9 million USD).

According to Akerman et al. (2015), superfast broadband improves income and productivity of skilled workers, but is bad news for unskilled workers with routine jobs; other research suggests that for every new industrial robot, six workers become jobless. Among the fastest shrinking occupations are switchboard operators, postmasters, mail superintendents and computer operators.

Some say that innovation requires a prize for the innovator (which ultimately results in growing inequality) for instance in terms of fiscal privileges for start-ups, enjoyment of significant market power (SMP) benefits (e.g. with Ramsey-Boiteux pricing and supernormal profits), “friendly” antitrust, extension of patents rights or longevity.

Gans and Andrew demystify those assumptions.

To begin with, in line with Mazzucato (2013), it is clear that a substantial share of innovative technologies are not arising from the inspiration of a lone genius but from systematic State activities. For instance, what makes smartphones so smart is the Internet, GPS, lithium batteries, voice recognition, multitouch screens and cellular technologies. Therefore, depriving the government from entrepreneur’s revenues might undermine public spending in innovation.

Secondly, according to the authors, absent risk aversion, income taxes only affect adversely the decision of an individual to become an entrepreneur if the tax rate is higher for the entrepreneur vis-à-vis other activities. For candidates to entrepreneurs, it seems that the probability of major success matters a lot more than the actual tax rate.

In addition, abuse of SMP may result in market exclusion of a large part of end-users, which have not enough income to subscribe to innovative services. This may, in turn, hinder the diffusion cycle of innovative technologies and cause significant social and economic inefficiency.

The authors seem also to suggest, at least implicitly, that lenient antitrust policies are not conducive to long-term productivity gains. In fact, innovation is increasingly difficult - since it is difficult for a single entity to master knowledge in the frontier of multiple fields (see my previous article on the “Innovation Commons”) - it can be seen anywhere, except, since 1973, in the productivity statistics. Ultimately, merger gains do not seem to be shared with the workforce, thus reinforcing inequality.

With regard to extending the longevity of patents, Gans and Andrew offer valuable evidence of negative effects. For instance, when Guglielmo Marconi denied AT&T (which had developed an improved version) a license of its diode patent, he undermined technological progress for years. On the opposite side, Qualcomm licensed universally its revolutionary CDMA technology and when the patent came to its end, had already developed other related technologies that allow the company to earn currently circa 20 USD for each smartphone sold.

So, what can be done to boost innovation and to reduce inequality?

The authors are proposing 10 ideas to promote innovation:

• encourage healthy competition between research funders;
• grants should foster “moonshot” innovation (even if the chance of failure increases);
• bring intellectual property laws into balance;
• build innovation training for everyone;
• use prizes to encourage innovation;
• beware of tax breaks;
• reduce barriers to entry for entrepreneurs;
• build catalytic networks and entrepreneurial ecosystems;
•  free up public sector and university science for innovation;
• update the national statistics (we need to know how the economy is performing today).

Finally, Gans and Andrew put forward 10 ideas to reduce inequality:

• make teacher effectiveness the top schooling priority;
• boost the quality of vocational training;
• simplify college loans;
• encourage massive on-line education;
• ban non-compete clauses;
• limit occupational licensing;
• reinforce independent workers;
• raise income assistance to poor families;
• encourage technologies that make jobs more family friendly;
• reform benefits, taxes and employment law to remove biases against working women.

References:

Akerman, Anders et al. (2015). The skill complementarity of broadband Internet, Quarterly Journal of Economics, vol. 130, no4, pp 1781-1824.

Mazzucato, Mariana (2013). The Entrepreneurial State: Debunking Public vs. Private Sector Myths. Anthem Press.

Potts, Jason (2019). Innovation Commons - The Origin of Economic Growth. Oxford University Press.