Underrated reasons to care about inequality

Fewer innovators means less innovation.

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Why should some people have so much while others have so little?

If you care about inequality, you may think that the answer to this question is self-evident: inequality is unfair, and because it is unfair, it is bad. This is a perfectly good reason to care about the issue: inequality is, of course, bad for the people who get the short end of the stick.

This essay is about a different side of the issue: there are good reasons to suspect that inequality is bad for everyone, from the middle class to the rich, and, more generally, for the progress of civilization itself.

Why bother to cover this territory? For starters, not everyone accepts that inequality is ipso facto bad. To the skeptics, inequality is a product of a system that serves everyone. Relative inequality, says this side, is a small price to pay for absolute progress in living standards. It could be true that economic systems that generate growth in living standards — market capitalism, for instance — also generate inequality, and that inequality among relatively wealthy citizens is preferable to equality among poor ones. Iraq is considerably more equal than the United States— which country would you prefer to live in?

It is not obvious that the claim underlying this competing story is true. In fact, there's a weak negative correlation between income inequality and real GDP per capita. That is to say, richer countries tend to be more equal (and vice versa). There's also a standard story about why this is the case: richer countries have more to redistribute. They equalize their societies by taxing economic activity and purchasing for their citizens those things that markets don't always do a good job of providing: literacy, health insurance, public goods like roads, bridges, and bad public art.

But it could still be the case that in rich, unequal countries, those at the bottom of the distribution are better-off than those at the bottom in rich, equal ones. Ireland is less equal than Slovenia, but more than twice as rich per capita — maybe the poorest Irish have better lives, in absolute terms, than the poorest Slovenians. If this is true, that makes it tough to value equality for equality's sake.

But you don't need to value equality for equality's sake; there are compelling reasons to value equality for instrumental reasons. In other words, even if you believe that inequality is a product of a system that generates opportunity and progress writ-large, you can also believe that it creates a drag on that very system.

The particular kind of inequality that generates these pernicious effects is inequality of opportunity. This is important to specify because, at least in the US, many different kinds of statistical phenomenon are grouped under the same heading: there is inequality of wealth, inequality of income, inequality of access to education, housing, or transportation; there is straightforward discrimination, bigotry, and racism. There is inequality in the abilities that people are born with and in the quality of the parenting or nutrition they receive.

The literature on this topic is not settled — there is an ongoing debate among economists about whether and how these various different kinds of inequality constrain economic growth. Yet there are compelling reasons to think that it is not only those on the losing side of an unequal distribution of resources who suffer: society at large pays the price.

Redistribution and predistribution

One good way to start understanding inequality is by thinking hard about the things that governments can do to try to remediate it. The simplest thing that governments can do to reduce inequality is to take money from the rich and give it to the poor. And redistribution is a big part of the story. But government can also reduce inequality by helping less well-off people build skills or take entrepreneurial risks. Discussions of inequality are sensitive to this predistribution/redistribution distinction: the difference between a model of the world in which existing inequalities are ameliorated by a tax-and-transfer system and a model in which those inequalities are actually prevented.

Consider an example: Khadija, the (hypothetical) daughter of an Afghan taxi driver who has immigrated to Paris. Khadija gets a first-rate education at the French taxpayer's expense, and proceeds to the Sorbonne, where she receives a master's degree in biochemistry. Khadija then lands a gig at Sanofi, the large French pharmaceutical company, where she leads a team that produces a revolutionary new drug — it saves thousands of lives and makes billions of dollars for the company.

As a result, Khadija lives well. But her apartment in the Marais is not paid for by the French government, and her sizable paycheck is not subsidized by taxing her colleagues, Jacques and Guillaume. Instead, her high performance (and high earnings) were enabled by the French state's early investment in her education. It's a more equal world— one that is made possible not by active redistribution but by early action to forestall future inequality.

Comparative advantage

A welfare skeptic might point out that there was probably more than one person in the running for Khadija's coveted job. Khadija's gain is Guillaume's loss; the money she takes home is money he's missed out on. This is the same old redistribution, says the welfare skeptic — we're just moving jobs around instead of money.

But not everyone is or can be equally good at every job. Suppose Khadija has a comparative advantage when it comes to pharmaceutical research. She's a better fit for the job, and since Sanofi is — at least in principle — a meritocracy, that's why she gets hired in the first place. Now suppose that the gap in skill between Khadija and Guillaume is what made the difference when it came to pharmacological success. In Khadija's absence, would Guillaume have discovered the crucial molecule? If not, than the simple act of making quality schooling available to Khadija was an enormously good investment: thousands of lives saved and billions in taxable economic value at the cost of an elementary-school education.

Since comparative advantage is the engine that allows a market economy to grow, these types of opportunities make a big difference on a macroeconomic scale. If inequality is severe enough, the exclusion of large numbers of people from the labor force means that every business has fewer candidates to choose from and, consequently, a lower chance of finding the best person for a job. Conversely, falling barriers mean that more people can find jobs that match their comparative advantages.

This describes what evidently happened in the US before the Civil Rights era: millions of Americans couldn't put their talents to use. As a result, of course, they themselves suffered— but so did the economy at large. When they were finally able to go to work in large numbers, it made a difference for the country. By some estimates, the entrance of women and Black people into the labor force in greater numbers contributed as much as 40% of aggregate per capita GDP growth since 1960. In other words: in a world where sexism and racism had remained yet more entrenched and institutionalized, the US in 2022 would be roughly as rich, on a per-capita basis, as Lithuania.

Innovators and lost Einsteins

This counterfactual world obscures an important truth about modern economies. Doctors, electricians, schoolteachers and librarians with a comparative advantage in their fields do propel economic growth simply by being good at their jobs. But a significant portion of the economic progress that has transformed the world since the Industrial Revolution is owed to technological innovation.

In contemporary economics, the role of innovation is fundamental. It's not just capital and labor that drive economic growth, but rather the way they're used together. New processes or technologies allow businesses to do more with less—to produce more output with the same amount of input. Occasionally someone (or someones) come along and invent something so world-changing that the whole world is soon unrecognizable.

The impact of the biggest innovations shows up at a large scale in statistics about economic growth. It no longer takes a room full of human computers to solve a differential equation — you can do it on your laptop. The US tech sector is now about 10% of GDP, and it was made possible by innovations like the integrated circuit designed by Robert Noyce. Innovation, in other words, requires innovators. Lifesaving drugs do not simply pop into existence from a vacuum—someone like Khadija needs to invent them.

At the scale of a society, a country, or a civilization, innovators are therefore a big deal. But they are hard to come by. And inequality make it even harder. Raj Chetty and his collaborators famously found that low-income youth are as much as ten times less likely to become inventors than high-income youth — and that this also holds true for kids with high math scores, which usually predict future innovation. This suggests that it's not that kids from poorer backgrounds lack the talent to become top performers, but rather that, at some point, they miss a crucial rung of the ladder. It's a pattern that repeats itself even at the highest levels of academic achievement: smart people with less economic opportunity go on to be less productive than those with more opportunity.

Talented kids with the potential to become innovators are certainly present in the most socioeconomically privileged segment of American society. But there are only so many ambitious heirs and Harvard-bound lacrosse stars to go around. Meanwhile, the US needs smart scientists and entrepreneurs so badly that we import them from other countries. Historically, this process has driven scientific progress, technological innovation, and entrepreneurship domestically — a process that has also benefited the world when technology developed in the US diffuses abroad.

It is a process that, with enough innovators, can continue indefinitely: there is no natural ceiling on the amount of innovation that can occur. But one clear bottleneck is a lack of opportunity for the most promising among us.