In a breezily written new book, Andrew Leigh and Joshua Gans ask whether innovation and equality can co-exist

The Segway is an example of an innovation that didn't catch on. Picture: Jan Pawe Bochen/Unsplash
The Segway is an example of an innovation that didn't catch on. Picture: Jan Pawe Bochen/Unsplash

It is commonly argued that inequality is the price we have to pay for innovation. But is this a false trade-off? Gans and Leigh argue that it is. Indeed, a central argument of their volume is that there are many ways in which a society can increase innovation and equality.

In other words, "we can have a bigger cake and slice it up more fairly". Their book shows how this can be done.

The thing about innovation is that no one is able to forecast the future and one never knows upfront what innovation is going to be successful. This is where uncertainty enters the picture.

Our forecasts of the likely success of an innovation are often way out. One of many examples is the Segway, that was "heralded as a revolution" and was certainly a well-functioning piece of equipment, but one that didn't catch on.

Good policies, the authors argue, are those respecting 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 should be shared by those receiving the benefits. And unresolvable uncertainty means that policies should be thought of in insurance terms.

In other words, how can we stimulate innovation while providing a buffer for those who are disproportionately affected by the cost of innovation? The authors argue that as a society, we should ensure that some of the rewards of innovation come back to those who are harmed by new innovations.

Is a bit of inequality worth it as a price for progress, as seems to be implicit in some governments' thinking? Innovators need a monetary return for their innovation. And they need to acquire some market power in order to make sure they get this.

Societies have devised various means to ensure that they get this market power. "This is what patents, copyright and trade secrets are all designed for: to protect creative innovations from imitative competition."

The authors argue that as a society, we should ensure that some of the rewards of innovation come back to those who are harmed by new innovations.

But these means of facilitating monetary returns are not always optimal. Here is an example Gans and Leigh give of how an innovator used secrecy to maintain the returns to his innovation. Forceps for childbirth was an innovation of Peter Chamberlen. By keeping the invention and its use concealed, Chamberlen prevented forceps from being used widely, and therefore allowed himself to reap greater returns.

But the bad news about this is that the value to society of the innovation was 'muted': fewer women benefited and lives were lost. Further, by keeping it secret, Chamberlen blocked others from being able to innovate 'on top of it'. In other words, secrecy prevents use as well as future innovation, and both are costly to society.

Sometimes societies go overboard in facilitating market power to innovating companies. Gans and Leigh raise issues of policies that companies use to exacerbate inequality. An example, employed widely across different states in the US, are non-compete clauses. These are where companies have secret agreements not to hire each other's workers. (This is the old problem of poaching that has been much discussed in the human capital literature on general and specific skills).

Such non-compete agreements inevitably give firms monopsony power over their own workforce, whose wages they can keep low knowing the worker won't be able to get a similar job elsewhere. The firms thus have market power.

And without labour unions (largely absent in the US), workers have no power to counterbalance this.

Given that innovations can put people out of work, Gans and Leigh argue for insurance. Providing insurance includes, amongst many other things, making sure that the education system gives individuals general skills that are portable across occupations.

Thus they will be better situated if they get displaced and if their skills become obsolete due to technological change. Rapid technological change raises Issues of lifelong learning and how to facilitate it.

The book is packed with ideas. Gans (a professor at the University of Toronto) and Leigh (an Australian MP and formerly an economics professor) write in a breezy style with occasional touches of humour. Their exposition is non-technical and the book has many examples and statistics presented in a user-friendly way.

The examples are largely from the US, which is perhaps unsurprising since it is published by MIT Press and clearly geared to a US audience. Moreover, inequality is strikingly present in the US.

The authors also touch upon the arguments that societies can be adversely affected if they are too unequal,

Gans and Leigh offer ten ideas for boosting innovation, as well as ten ideas for reducing inequality. Policy-makers in Australia should read the book and take note.

So too should others with a desire to understand how innovation works. And to gain insights into how a country like ours might be able to produce a bigger cake and to share it more equally across its citizens.

  • Alison Booth is a novelist, and Professor of Economics at the Australian National University.
  • Innovation + Equality: How to Create a Future That is More Star Trek than Terminator. Joshua Gans and Andrew Leigh. MIT Press.
This story More Star Trek than Terminator? first appeared on The Canberra Times.