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Already in 1975, American economist Arthur M. Okun described the big trade-off between efficiency and equity that politicians face: should the pie get bigger through higher growth rates, or should it be distributed more equally?
Joshua Gans and Andrew Leigh take a different view of this trade-off. They argue that Schumpeterian creative destruction introduces uncertainty, because it is ex-ante unknown what innovation will occur, what said innovation will look like, and the kind of winners and losers it will produce.
Thus, the gains and losses from innovation don’t just shape the income and wealth distribution within an economy, but also are unpredictable at the individual level. In this regard, economic policy can be seen and used as insurance to mitigate the negative distributional effects of innovation.
In the first part of the book, Joshua Gans and Andrew Leigh describe in great detail how innovation and inequality are linked. In essence, innovation needs to be rewarded and entrepreneurs must profit from their innovation. Their arguments are clear, and often illustrated with interesting references to movies or historical anecdotes. This makes it very easy to follow their line of thought; while it is always clear that the narrative is grounded in economic research.
In the second part of the book, the authors focus on specific economic policies that can be used as insurance and/or foster innovation. These range from better education to extending the US federal earned income tax credit.
While all the suggested policies seem very reasonable ways of addressing many equity issues without distorting innovation, the authors over-sell them a bit.
Every redistributive policy has a cost, every government program needs to be financed, and any policy that changes the cost structure of a firm will inevitably also change the allocation of resources within the firm in question.
Although the suggested policies might not have a direct negative impact on innovation, financing them through taxes might have. Discussing or including a short cost-benefit analysis would have strengthened the authors’ policy recommendations.
Still, the main message of Joshua Gans and Andrew Leigh books is clear and important: politicians must consider the close relationship between inequality and innovation (growth), when addressing either in isolation.
INNOVATION AND EQUALITY is published in paperback by MIT Press, pp. 192, $19.95, November 2020.