Innovation in the Twenty-First Century

Thomas Piketty’s book Capital in the Twenty-First Century has gotten a better reception from left-liberals than any book since  Limits to Growth. The books have important similarities. Both posit societies in the grip of a doomsday pincer. Limits foresaw a future of poverty and hunger, as inevitably declining resources outrun inevitably increasing population. Piketty sees a future of increasing inequality, as capitalists enjoy an ever-greater share of global income than workers. Both books are also used to justify government intervention. Limits to Growth was the basis of attempts to slow down population growth and require conservation of resources. Capital in the Twenty-First Century expressly calls for a global wealth tax.

Most importantly, both books share a similar, fundamental flaw, although Piketty’s book is far more interesting and sophisticated. They do not take sufficient account of innovation– of the manner in which human ingenuity again and again benefits us all. The mistake in Limits of Growth has already become clear, as Matt Ridley reminded us in the Wall Street Journal last week. We are not running out of energy, for instance. We have more usable oil than ever as we have learned to exploit shale. Innovators are creating wide variety of energy sources that were either not well understood or even imagined in 1972, when Limits to Growth was first published.

Piketty’s book has the same flaw. In his lucid and favorable review, Robert Solow shows that Piketty’s claim of increasing inequality is based partly on his belief that the rate of return on capital will stay constant, even as economic growth slows. In Piketty’s view, a sluggish economy means that people who own capital will gain a greater share of income than people who earn wages. This projection depends on a technological slowdown . But with the relentless increase in computational power, there are more reasons to believe in technological acceleration than stasis. One important point I have previously discussed is that lower economic growth rates in recent decades (from which Piketty extrapolates) are in large measure an illusion. Because of radical improvements in computation, telecommunications and healthcare, centralized government statistics have more and more trouble comparing the costs of bundle of goods from year to year. As a consequence, these statistics overstate inflation and understate growth.

But even more fundamentally, Piketty mistakes the nature of innovation in the twenty-first century. As I have observed:

Economic value is thus increasingly created not by material things but by the information that arranges the material. And information can be shared equally in ways that material goods simply cannot. As Thomas Jefferson famously put it, “He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.” In the information age, we enjoy ever-greater access to a common pool of ideas that generates more value and consumption for all, substantially tempering the effect of technology’s differential boost to incomes.

Thus, even if we have different incomes from capital, we all share in common a continuing stream of value from intangible ideas that have become free. As a result, we are more, not less equal than before. We can feel this concretely in a variety of ways. For instance, people get faster access to innovations than ever before. 56 percent of Americans have a smartphone although this technology first appeared less than a decade ago. But it took decades for ownership of refrigerators to reach similar levels. And the middle class and the very rich alike spend a huge amount of time on the internet where their experience converges. And perhaps most importantly the great innovations in health care are rapidly enjoyed by the middle class. Most of us enjoy more equal experiences of the world than in past centuries. As the new innovations occur, we will become more equal, because these innovations will rapidly become very low priced and even free.

In my next post, I will discuss how Piketty’s proposals to address inequality also fail to account for the nature of innovation in our time.

John O. McGinnis

John O. McGinnis is the George C. Dix Professor in Constitutional Law at Northwestern University. His recent book, Accelerating Democracy was published by Princeton University Press in 2012. McGinnis is also the co-author with Mike Rappaport of Originalism and the Good Constitution published by Harvard University Press in 2013 . He is a graduate of Harvard College, Balliol College, Oxford, and Harvard Law School. He has published in leading law reviews, including the Harvard, Chicago, and Stanford Law Reviews and the Yale Law Journal, and in journals of opinion, including National Affairs and National Review.

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Comments

  1. R Richard Schweitzer says

    Hopefully, you will also address the equally important issue of “Open Access.”

    There are indications throughout the global economy of increasing restraints on “Access.”

    Access includes the freedom and availability of formations of associations.

    The global socio-economic environments of ever-increasing Rules of Policy, legislation, regulation, ordinances, ministerial directives, political intrusions; requirements for conformity to externally determined structures of relationships, all combine to limit Open Access.

    Plausible arguments can be made that those constraints On Open Access may be a, if not the, major factor in the continuing concentration of accumulating wealth.

  2. gabe says

    One need only look at the actions of the European Union’s economic agencies to sense the truth of what Richard here asserts. Sadly, it is also present, if not prevalent, in the US.

  3. nobody.really says

    Let me see if I’m following you: Sure, capitalists will earn ever more money, but we’ll ALL be richer in information a/k/a Youtube videos, so when you calculate the ratio of benefits for capitalists to benefits for everyone else, it won’t be so bad. Is that it in a nutshell?

    And maybe that’s right. Information is valuable stuff, and we have more of it cheaper than ever before. (Though I’m still concerned about the economic model for investigative journalism….) But I can’t eat information; I’ll still need food. Remember food? You know, good ol’ fashioned private goods for which my consumption precludes everyone else’s?

    True, I might be able to use all this information to create MORE information – my own Youtube videos. But as McGinnis reminds us, “these innovations will rapidly become very low priced and even free.” So I’m still left wondering how I get food?

    Finally, it’s not entirely clear to me that Piketty and McGinnis are talking about the same things when they disagree. It may well be that this brave new world will make everyone richer – but will make a tiny few vastly richer. The purpose of the wealth tax may not be to rescue people from poverty, but rather to simply distribute the surplus more broadly (and perhaps to guard against the social ills that allegedly come from inequality, e.g., distortions in the political process, etc.) As Tyler Cowen hints in Average is Over, in an era of powerful economies of scale (especially regarding public goods such as information), the triumph of capitalist wealth production may coincide with the demise of capitalist wealth distribution. Piketty may simply be advocating for a new mechanism for sharing the vast wealth.

    • gabe says

      ” but will make a tiny few vastly richer.”

      So why is that any concern of yours. I mean really.

      Do you criticize football or baseball players because such a system as is currently employed by major sports leagues provides that a tiny fraction of the populace is able to make as much as $50,000 per at bat or $500,000 per touchdown.
      I may get a kick out of it (especially since my little Seahawks kicked butt) but i really can not eat a touchdown.
      I ain’t pissed about it AND i am not asking that, say, Richard Sherman will give me a chunk of his upcoming mega-contract (although I would settle for a new set of irons for my crummy golf game) nor am i asking that he be limited in the amount of interceptions that he can have per season (I mean, after all, we wouldn’t want anyone to be deprived of their just share of glory would we).
      You can’t eat information and I can’t eat interceptions; however, the information may make it easier for you to make a living or find suitable employment. You should be happy. How about me? those dang interceptions are good for exactly NADA – but I ain’t complaining!!!!!!
      take care
      GO SEAHAWKS!!!!

      • nobody.really says

        Do you criticize football or baseball players because such a system as is currently employed by major sports leagues provides that a tiny fraction of the populace is able to make as much as $50,000 per at bat or $500,000 per touchdown?

        No, I celebrate them! And then I tax them. What’s criticism got to do with it?

        (It’s odd how often people want to turn a policy discussion into a morality play. Perhaps humans really are hard-wired to interpret the world in religious terms.)

        ” but will make a tiny few vastly richer.”

        So why is that any concern of yours?

        I’m doing an inventory of resources, no different than observing which people are physically able to bear arms, or which people have Type A blood.

        I mean really.

        gabe, we’ve known each other long enough that you shouldn’t feel like you have to address me by my last name. Please, call me nobody.

        I may get a kick out of it (especially since my little Seahawks kicked butt) but i really can not eat a touchdown.

        Yeah, we’ll just see if the 49ers don’t jam a few touchdowns down someone’s throat….

        • gabe says

          ” I mean really.

          gabe, we’ve known each other long enough that you shouldn’t feel like you have to address me by my last name. Please, call me nobody.”

          Absolutely luv’d it!!!!

          Althopugh you seem to have missed my point about “apparent” value or lack thereof..

          I have different objections to the “wonders” of an “information based age” – it ain’t gonna win any wars – we need to make things, lot’s of ‘em; it keeps folks employed (and feeds them as you suggest) and provides the industrial might which has been responsible for victory in all engagements since the Civil War.
          Next time someone comes at you with an AK-47, see if a couple of lines of code will do any good. I don’t think so.

          Take care, nobody – I mean really – Oops there i go again using your last name.

          gabe

    • R Richard Schweitzer says

      “. . . **capitalists** will earn ever more money . . . ”

      And, **who* are the **capitalists**; pension fund beneficiaries; homeowners (with mortgages); life insurance policyholders; shareholders of mutual funds and traded corporate stocks; two-car families; academy endowments; those who lend money to governments (federal and state)- who?

      Suggestion: All of us who participate in the human interactions that result in the condition we label capitalism are **capitalists,** unless we confine the title to those who “own” something (even something thought insignificant). In the matter of large “valuations” of such ownership, the *control* of the use of productive assets (or of deployments of surpluses) rather than nominal “ownership” has come to be the determinative feature of how those human interactions are currently conducted to generate the resulting condition, for which degrees of freedom are still required.

      Food: Consider what has happened with food (globally, as well) from *political* actions, not capitalist cupidity (not that haven’t been opportunists). Concentrations of nominal ownership of “wealth” is not what has caused the pressures on availability of food (and its prices or efforts needed to obtain it). Remember what has driven up the costs of moving food (distribution)? What has taken enormous western acreage out of food production, politics or “greed?” Was it the **capitalists**? Was it the “concentration of wealth?”

      There are those who would cut down the trees of wealth because **too much** of their fruit grows “too high up” for everyone to get something like an equal share; without regard to adequate fruit for the future with no, or fewer, trees.

      • nobody.really says

        “. . . **capitalists** will earn ever more money . . . ”

        And, **who* are the **capitalists** … who?

        Ok, bad word choice; sorry. Following the arguments of Piketty and Solow, I was referring to people with lots of capital, who derive a disproportionate share of their income from capital rather than labor, and thus who will be shielded from the consequences of a world in which returns to labor are low.

        Food: Consider what has happened with food (globally, as well) from *political* actions, not capitalist cupidity (not that haven’t been opportunists).

        Ok. I see that, thanks to government and nonprofit research by Fritz Haber and Normal Borlaug, the world now produces more food than ever before possible. I see that government-funded/regulated transportation systems (roads, rails, ships) reduce distribution costs.

        But actually, I was merely using food as a metaphor. That is, I’m using food to illustrate the difference between public goods (e.g., information) and private goods. McGinnis is sanguine about the consequences of wealth disparity, grounding his arguments in the abundance of information. I question whether the conclusions we draw about the distribution of public goods can be generalized to the distribution of private goods. In a world of increasing wealth disparity, will we return to Dickensian England where the price of private goods gets bid up so high by the affluent that it becomes beyond the reach of the rest of us? Consider: Has the abundance of information produced an equitable distribution real estate in Manhattan among economic classes? Or do we observe that this private good is distributed overwhelming to the affluent?

        There are those who would cut down the trees of wealth because **too much** of their fruit grows “too high up” for everyone to get something like an equal share; without regard to adequate fruit for the future with no, or fewer, trees.

        Perhaps so. But if you haven’t bothered to open your eyes recently you may be surprised to discover that, compared to people in any other place or time, we’re effectively LOST INSIDE THE AMAZON RAINFOREST. Thus, while homilies about avoiding needless pruning remain as true as ever, I can scarcely think of a context in which this concern could have a lower priority.

        • R Richard Schweitzer says

          “. . . referring to people with lots of capital, who derive a **disproportionate** share of their income from capital rather than labor.”

          Which of course is “inappropriate” and unacceptable?”

          Does that raise the issue of what would be “proportionate;” and how that determination should be made (as well by whom and as to what end)?

          Suggestion: “government-funded” is taxpayer-funded. Governments have no money. Governments do not do research, do not discover, do not innovate, do not have imagination – people do. All else is political vanity.

          “I can scarcely think of a context in which this concern could have a lower priority.”

          A similar context: years ago there was a cartoon in the “New Yorker” magazine in which a group of theoretical scientists were gathered in front of a blackboard with diagrams and equations. The leading haranguer says, “How do we know that destroying the Van Allen Belt will be disastrous until we try it?”

        • gabe says

          “In a world of increasing wealth disparity, will we return to Dickensian England where the price of private goods gets bid up so high by the affluent that it becomes beyond the reach of the rest of us?”

          Perhaps you should review some of the work of T.S Ashton for a corrective of this somewhat jaundiced view of Dickens times. Pricing was subject to several cyclic swings during this period; however, the overall trend was downward.
          Much of the upward spirals can be attributed to a) foreign adventurism, b) the residual power of a dying agrarian aristocracy to which the Parliament was enthralled (especially with respect to food staples, linens, etc), c) misallocation of materials as a result of war / defense requirements, d) the increased spending power of the “previously poor” who in fact constituted the far larger consuming public demand for limited goods.
          One might also mention idiotic and protectionist trade / tariff policies and such delightfully beneficial state mandated remedies as the “Corn Laws.

          So let’s get real here and attribute blame as the actual historical facts indicate – not as one is wont to do within the confines a a faculty lounge (even if one has simply passed through such a facility.

          take care
          gabe

        • gabe says

          ” I was referring to people with lots of capital, who derive a disproportionate share of their income from capital rather than labor, and thus who will be shielded from the consequences of a world in which returns to labor are low. ”

          So what exactly are you talking about. do you believe that capital and labor are distinctly separate? Perhaps, one could better appreciate the false problem which you presnt were one to consider that capital is nothing but monetized labor AND that is derived from labor of some sort (whether it be coding, farming, or essay writing). In the final analysis disproportionate capital holders” (incidentally you and i and anyone with a 401k or pension, etc) depend upon some form of labor for their “excessive” returns – shake it any way you like – there ain’t capital without labor and to argue that if labor suffers capital will not ultimately suffer is inane.

          and, Oops, EXCUSE ME, IF YOU THINK THIS TOO IS A RELIGIOUS ARGUMENT. In nomin patris, et fili tu…….

          • nobody.really says

            do you believe that capital and labor are distinctly separate?

            I distinguish between labor and capital — as do Piketty, Solow, every economist I’ve ever discussed the topic with, and the US tax code. I may be inane, but I’m in good company. (Ok, the tax code isn’t always the best company, but if you get a few drinks into it, you’ll hear some amazing stories….)

          • gabe says

            Perhaps it may be separate for tax purposes but not in the context of arguments seemingly advanced by you and Piketty.

            If labor is to be as injured as you allege, so too will be capital.
            What do you still believe it sits in a bank and just grows and grows on its own. Heck, even my tomatoes don’t do that!!! They need labor or the products of someone else’s labor (fertilizer).
            Perhaps you can help with that?

  4. Peter LawlerPeter Lawler says

    The bottom line: The cognitive elite or those especially adept in manipulating techno-genius machines (or manipulating those nerds who manipulate those machines) will have a lot more MONEY. But we can also see and read the same stuff on SCREENS. That’s a refutation of Piketty (whose book isn’t so great but has an eery factual overlap with Tyler Cowen’s AVERAGE IS OVER)?! I do agree that Piketty underestimates techno-innovation and its effects, but it also could be a proper estimation wouldn’t really be more egalitarian.

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