Innovation and inequalities
GAICIL Insights
Capitalism, in a phrase the authors borrow from Rajan and Zingales, needs protection from the capitalists.1 Innovation and inequalities, by Philippe Aghion and Rachel Griffith, builds an agenda around that paradox. Innovation is a key source of sustainable growth, and it can increase some inequalities while decreasing others. Its impact depends importantly on who controls the property rights to exploit it and what they do with it. Innovation can change the power of market actors, the way markets work and the returns to different attributes.
Two challenges frame the paper. The first is making innovation-led growth more inclusive and more protective. The memorable formulation: a US ecosystem of innovation together with a Danish system that protects individuals who lose their jobs and insures everyone against large macro shocks. COVID-19 vaccines illustrate the point. They owed everything to the innovation systems of the USA and UK, which funded basic research and its conversion into vaccines produced at very large scale within less than a year. Yet the pandemic hit the most vulnerable individuals in those countries very badly. Brilliant invention and weak protection coexisted in the same societies.
The second challenge is encouraging innovation while ensuring yesterday's innovators do not use their rents to deter new entrants, eventually undermining productivity growth and social mobility. Several instruments are needed at once: progressive taxation, a rethinking of competition policy in light of the IT and digital revolutions and the emergence of superstar firms, and close analysis of lobbying and the interface between politicians and the private sector. Today's disruptor is tomorrow's gatekeeper unless institutions intervene.
Bring the result forward to the present. Artificial intelligence makes this framework urgent. AI is a powerful source of innovation, and its effects on inequality will depend on who controls the property rights to its applications and how they use them. It can change market actors' power and the returns to different skills. Ownership of models, data and distribution may decide who gains.
The US-plus-Denmark vision fits AI closely. AI promises large productivity gains and significant disruption for some workers. A system encouraging innovation while insuring workers against job loss can capture the gains and share them. The goals reinforce each other: protection builds public support for innovation, and innovation generates the resources for protection. A safety net is part of the innovation infrastructure.
Incumbent behavior is the central AI risk. Firms leading in AI today may gain positions allowing them to deter future entrants. If so, the dynamism driving AI progress could slow. Competition policy updated for digital markets, together with scrutiny of lobbying, can keep markets open to new innovators and preserve the conditions under which new firms challenge established ones.
No single lever suffices. Taxation, competition policy, social insurance and governance of political influence each address different dimensions, and coordinating them is the policymaker's challenge in the AI era. A government pulling only one lever will find the others pulling against it.
The vaccine story offers an AI blueprint. Public funding for basic research, combined with private capacity to scale, produced extraordinary results. AI development similarly depends on basic research, much of it publicly funded, and on private investment in deployment. Policies sustaining both elements can accelerate beneficial innovation.
Social mobility is the moral stake. Innovation driven by new entrants creates opportunities for individuals from diverse backgrounds to rise. When incumbents block entry, mobility declines. Keeping AI markets contestable is a matter of fairness as well as efficiency. The startup founder from nowhere depends on the door staying open.
Stepping back, innovation and inclusion can be pursued together with the right institutions. A dynamic innovation system, strong social protection, open competition and checks on political influence form a coherent agenda. As AI drives the next wave of innovation, this agenda offers a path to growth that is rapid and widely shared.
The countries that win the AI century may be the ones that copy two models at once, a US-style ecosystem for inventing and a Danish-style system for absorbing the shocks. Choosing only one may yield either stagnation or backlash.
Introduction
Innovation is a key source of sustainable growth, but it can affect inequalities in many ways—increasing some inequalities and decreasing others. The impact of any particular innovation on inequalities will depend importantly on who controls the property rights to exploit the innovation and what they decide to do with it. The introduction of an innovation can affect the power of different actors in a market, the way markets work, and the returns to different attributes of actors in the market. All of these factors and more will influence how innovation affects inequalities. We would like policy to encourage innovation while making sure that yesterday's innovators do not use their rents to deter innovation by new entrants, thereby eventually undermining productivity growth and social mobility, and increasing inequalities. This requires a combination of regulation, progressive taxation, and enlightened competition policy.
Takeaway
Innovation is key source of sustainable growth. A first challenge is to make innovation-led growth more inclusive and also more ‘protective’. In short, we want a US eco-system of innovation, together with a Danish system to protect individuals who lose their jobs and to insure all individuals against big macro shocks. On the one hand, the COVID-19 vaccines owe everything to the innovation systems in place in the USA and UK, which provided funding both for the basic research and for converting this basic technology into vaccines produced at very large scale within less than a year. On the other hand, COVID-19 hit the most vulnerable individuals in the USA and UK very badly. A second challenge is to encourage innovation while making sure that yesterday’s innovators will not use their rents to deter innovation by new entrants, thereby eventually undermining productivity growth and social mobility. Capitalism thus needs to be regulated, or to use this excellent expression from Rajan and Zingales (2003) ‘we need to protect capitalism from the capitalists’.2 This requires that several instruments be used simultaneously: not only progressive taxation, of course, but also we need to rethink competition policy in light of the IT and digital revolutions and the emergence of the new superstar firms; we also need to closely analyse the organization and functioning of the lobbying system and the interface between politicians and the private sector (see Bertrand et al. 2014).31
Notes
- Philippe Aghion & Rachel Griffith, Innovation and inequalities, 3 Oxford Open Econ. i1002 (2024), https://doi.org/10.1093/ooec/odad057. Takeaway source: Final comments: improving capitalism, reproduced from the openly licensed version (CC BY 4.0). ↩
- Rajan, R., and Zingales, L. (2003) Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread. ↩
- Bertrand, M., Bombardini, M., and Trebbi, F. (2014) ‘Is it Whom you Know or What you Know? An Empirical Assessment of the Lobbying Process’, American Economic Review, 104 (12), 3885–920.. ↩
Cite as: Philippe Aghion & Rachel Griffith, Innovation and inequalities, 3 Oxford Open Econ. i1002 (2024), https://doi.org/10.1093/ooec/odad057
Header image: 2023-02-20, JCB JS220LC tracked excavator, Veže Brezovec construction site, Dolný Kubín, Slovakia.jpg by Oto Zapletal, CC BY 4.0, via Wikimedia Commons.
