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Destructive upward mobility: innovation and social mobility

Evariste Lefeuvre By Evariste Lefeuvre Published on November 5, 2015

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Technological progress and the associated change to the economic order - via automation of tasks, substitution of machines for labor or the "premium" assigned to higher education graduates - are often mentioned in the long list of factors that account for the widening of inequalities. The impact of innovation nevertheless depends on our criterion for assessing inequalities. Are we looking only their amplitude or rather at their dynamics? Do we measure it by the yardstick of the highest incomes (1%) or the middle class?

Innovation is a destructive process, as Joseph Schumpeter clearly showed, but it is also often accompanied by social advancement for those who put it into action. This is what I call destructive upward mobility: not far from 20% of the richest Americans according to Forbes magazine are in the "inventor" category.

Measured by the yardstick of the number of patents and their quality, innovation presents a positive relationship with social inequality. According to a study carried out by the NBER, 17% of the increase in the share of the income of the richest 1% since 1975 can be ascribed to this phenomenon. Regional differences are very marked: California is the most technologically advanced state, but also one where the richest 1% receive 20% of the income. In Alabama, which is far less innovative, the share of the 1% is limited to 15.8% of the income.

An analysis of the link between innovation and inequalities would be incomplete if we did not introduce a third factor: social mobility. The reason why California is more inegalitarian than Alabama is perhaps because it has greater social mobility.

The chart below shows the "Great Gatsby curve", with reference to Francis Scott Fitzgerald’s masterpiece. It shows that the US states that have the highest degree of inequality are also those that have the lowest level of social mobility, defined as the probability for a family’s direct descendant to have an income close to that of his/her parents.

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One of the major explanations of the existence of this curve is based on access to education. If technological progress presents a bias to the advantage of the skilled and, at the same time, access to higher education is reserved for the wealthiest, then there will be no major break in the family trajectories from one generation to the next. Family, professional and academic networks plays a similar role. The obvious danger is that this situation may be self-sustaining, especially because of the low level of resources available in the poor states where the payment of replacement incomes (unemployment benefits, housing aid, etc.) reduces the education budget.

Does the Gatsby curve disprove the hypothesis according to which innovation, social mobility and inequalities are closely linked? Not really. For it is based on a wide definition of inequalities (5th decile versus 1st decile - i.e. between the low and the middle of the income scale), while innovation seems to disrupt the ranking only in the very high income brackets (1%). According to the studies of Aghion, Akcigit, Bergeaud, Blundell and Hemous, innovation is positively linked to social mobility towards the richest segments of the society, a relationship that is driven by new entrants who turn the established order upside down (disruptive innovation, and not incremental innovation based on existing products).

The underlying factor of the widening of inequalities associated with destructive upward mobility is innovative activity, whose impact on growth is generally positive. It is crucial to not unduly tax innovation rents if they are an incentive to innovate and therefore the guarantor for technological progress that is positive for growth. Disruptive innovations contribute to destructive upward mobility, a widening of inequalities at the upper end that would be dangerous to reduce by taxing activities and temporary rents that have a positive impact on growth.

Innovation: The price of inequality?

This is the argument most often put forward against policies aimed at correcting inequalities. If they are the result of an innovation process and if they are combined with increased social mobility, the process of creative upward mobility should be allowed to operate fully! It will turn upside down the established positions at the top of the ranking. This fails to take into account two phenomena:

1. The defense of established positions: the methods for promotion of technological progress are not always the most "fair". They sometimes result in an attitude of protection rather than exploration;

2. While one can "accept" the widening of inequalities specific to innovative activities (in particular because they are concentrated in the highest income brackets), it is, on the other hand, urgent to fight the Gatsby curve. The social stagnation it embodies comes on top of the technological progress to extend the education premium and hamper the potential for expression of the youngest generations, which are most often behind the most radical innovations.

Defense of the established

The social upward mobility associated with innovation, even though it is often accompanied by a phenomenon of "winner takes all" that may lead to a widening of inequalities, is probably a real innovation driver. This upward mobility is not based only on the intellectual property pillar. There are in fact very few studies that show that the introduction or tightening of intellectual property laws have changed the degree or the nature of innovation. What has most generally been observed is a protection reflex, a defensive approach to patents. Arora, Belenzon and Patacconi show, with the Chart below, that the transformation of companies’ structure at the turn of the 1990s changed their relationship with basic scientific research considerably. The internationalization of their processes and the shortening of the horizon for management objectives drove “large firms to value the golden eggs of science (as reflected in patents) but not the golden goose itself (scientific capabilities)."