Why the innovation revolution risks governments letting inequality rip | Greg Jericho | Business | The Guardian

In a key scene of the movie The Social Network, Sean Parker, played by Justin Timberlake, says to Mark Zuckerberg about the prospect of his website Facebook making a million dollars, “A million dollars isn’t cool; you know what’s cool? A billion dollars”.

Zuckerberg is now alone worth around $73bn.

The world’s richest person is the founder of Amazon, Jeff Bezos, yet he did not predict his own success. He even admitted he didn’t predict Amazon itself would become what it was. It was originally “a very small company” and the success came from just putting “one foot in front of the other” for more than 22 years.

These two anecdotes are featured in a new book by the Labor shadow assistant treasurer, Andrew Leigh, and economist Joshua Gans, Innovation and Equality: How to Create a Future That is More Star Trek than Terminator. Their book seeks to look ahead, not so much to predict the future but to recommend policies that ensure innovation does not come with greater inequality.

The reality is the future is hard to predict.

In the 1980s, I – like most other kids my age – viewed a computer as a luxury which would be likely beyond my parents’ budget. Now, AV and computing equipment are standard items:

In the 1980s we might have known that AV and computing equipment would get less expensive but few would have accurately guessed by how much.

Some changes are crafted by market forces and technology and others are government driven.

For the first 23 years of my life you could be pretty confident that the price of cars would rise along with inflation. But then tariffs were cut and imports increased. While the average price of goods and services is now 73% higher than it was in 1996, the average price of a car is 27% lower than then.

Or, to put it another way, the equivalent to a $25,000 car in 1996 is now one that costs $14,300.

This collision of market forces, entrepreneurship and government policy are at the heart of Gans’s and Leigh’s book. While primarily written for a US audience (it is published by MIT Press), it has both good advice and warnings for Australia.

Gans and Leigh note that employment rates of “prime-aged” men in the US are well below those of the 1970s and 80s. The same can be said of Australia:

When we look at full-time employment we can truly see changes that were largely unforeseen. In 1980, 89% of men aged 25-54 worked full-time; now it is just 78%:

Gans and Leigh note that with this decline in employment rates has also come a stagnation of household incomes in the US – although not for all. Those at the top are doing very nicely – the incomes of the top 0.001%, they note, “have risen by 6 percent annually” since 1980.

But, they ask, is the rise in inequality due to innovation and technological progress? And, if so, does that mean innovation and progress requires inequality?

Does the cost of our iPads and streaming services increase inequality because such innovation requires conditions where those who innovate get an overly large share of the pie?

They conclude the answer is no.

They note, for example, that the top mathematicians and engineering students at universities like MIT were more likely to go into science or engineering research than into more profitable finance jobs. They conclude that “the decision to become an entrepreneur or inventor is not all about the money. Top students are more likely to become innovators.”

And as they note, neither Bezos nor Zuckerberg had any intention of attaining anywhere near their current level of wealth when they began Amazon and Facebook.

And yet we see policy being driven as though we need to increase the financial incentives for entrepreneurs and innovators.

Instead Gans and Leigh argue that “modest increases in taxation at the federal level are unlikely to have a big effect on who chooses an entrepreneurial path.”

They argue that “if we want to encourage innovation, it doesn’t make sense to let inequality rip. Starving the government of tax revenue will undermine public-sector innovation.”

They conclude: “A world in which innovation was not rewarded would not be conducive to entrepreneurship. But requiring top earners to be shielded from taxation is not a necessary price to pay for that innovation.”

The problem, however, is that company practices and government regulation not only help foster growth of wealth of these innovators, it does so to the detriment of the workers.

Gans and Leigh note in the US many large companies have monopsony power (essentially a monopoly over the ability to buy labour), and are ruthless at maintaining it – such as Amazon putting in place hiring conditions that prevent employees from working at similar firms for 18 months after leaving.

In such cases the onus is on governments to ensure industrial relation laws prevent such stifling of competition and wages.

Similarly Gans and Leigh note that many workers do like the flexibility of the gig or share economy but “even multiple sharing economy jobs may not allow workers to earn enough to buy a house or raise a family” and “gig economy workers often lack health insurance and retirement savings” and are also “vulnerable to discrimination”.

It is not the job of governments to hold back this change but it is, they argue, their job to adapt – and not treat such workers as old-style independent contractors, when clearly they are closer to employees.

Australia now has a one-speed economy – and that speed is slow | Greg Jericho

Last month the Labor leader, Anthony Albanese, took such a line when he argued “it is time to have a conversation about new forms of worker protections, which can be made as flexible as the gig economy jobs they could cover, as well as benefit more traditional industries”.

Gans and Leigh argue that rather than worry about what taxes need to be cut to encourage innovation, government should be more worried about fostering a rise in people who are willing and able to innovate. As such education is a key – and importantly good teachers.

They note that “the difference between good and bad teachers translates into $250,000-higher lifetime earnings for every child” – which if applied across a class of 20 or more students makes a terrific teacher “literally worth their weight in gold”.

So much government policy is developed through a myopic view that people only do things for profit and that the more profit they can make the more likely they will be to pursue innovation.

Gans and Leigh provide a strong counter to this, arguing that while innovation is a key to driving productivity, the improvements in living standards that should flow as a result can only come if governments pursue policies that aim “to boost both innovation and equality”.

They argue this is akin to house or car insurance – in an uncertain world “society”, they write, “needs to think about social insurance policies that suit an uncertain future.”

• Greg Jericho writes on economics for Guardian Australia