Innovation for the Masses: How to Share the Benefits of the High-Tech Economy
Neil Lee
248 pages, University of California Press, 2024
While innovation is vital for economic success. The world's great tech hubs—from Silicon Valley to Shenzhen—are often riven with inequality. Innovation matters, but the benefits are not always shared.
This isn't an abstract problem for me; it's a personal one. I'm from Oxford, England, a place synonymous with innovation and new technology, but one of the UK's most unequal cities. It's a great place to live if you're a star scientist, but less so if you're a social worker or a nurse. I've spent much of my career looking at innovative places like Oxford. But that's not enough: We also need to work out how to share the benefits.
In my new book, Innovation for the Masses: How to Share the Benefits of the High-Tech Economy, I look at examples of places that do this well. I draw on four very different case studies: 1. Switzerland excels at diffusion, through vocational education, applied research, and geographical equity, and is one of the best places on earth to be a worker; 2. Austrian industrial policy directed technological change at low-tech sectors and prevented deindustrialization; 3. Taiwan's education system balanced growth with equity as it developed; 4. Sweden's large state has been a part of its success in digital tech.
I'm not the only one worried about the exclusive innovation economy. According to Brookings, the Biden administration is spending almost $80 billion on place-based industrial policy, with the aim of sharing the success of the US tech economy across the country. It's not clear yet if these efforts will succeed, but it shows a recognition that something needs to happen. If workers don't benefit from innovation, they won't support it. A failure to share the benefits will risk the pro-innovation policies on which our prosperity depends.—Neil Lee
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The economics of innovation, growth, and welfare is complicated. Academics like to make it even more so by adding layers of complexity and nuance. Some portray innovation as a linear process, others as a chaotic one. Some recommend policy that is transformative, mission-oriented, or finely tuned for specific local ecosystems. Others think the state should avoid these fads and simply fund basic research. There is little agreement on how best to spur innovation. But most do agree on one thing: innovation matters for people's living standards.
There are, fundamentally, three types of rich country. The first group is rich because of extractive industries. Norway, Kuwait, Saudi Arabia, and other countries have high incomes because they sell the hydrocarbons found in their lands and waters. It is easy to waste such assets, of course, and many countries have done so. But most countries don't have the assets to squander in the first place. Having oil or natural gas reserves is a matter of luck, not judgment.
Extractives are a viable route to prosperity only for a lucky few nations.
A second set of countries—such as Luxembourg, Ireland, and Singapore—has grown rich through what can be euphemistically called openness. These countries tend to be small financial hubs.
They have skilled populations, locations next to large markets, and, often, very low taxes for international firms. A charitable interpretation of this strategy is that they are dynamic, open economies that attract global capital. A less charitable one is that they are tax havens. There is probably some truth to both characterizations. Competing on very low corporate taxes is, however, an option for only a few countries. Tax competition is a zero-sum game, a strategy that moves wealth around rather than making more of it. If all countries did it, there would be a race to the bottom, with states competing by reducing welfare standards and public services.
A third route to prosperity is innovation, or the development and application of new products and processes. Because natural resources are finite and tax havens are small, most rich countries have innovation at the heart of their economic model. If you plot their gross domestic product (GDP) per capita, a measure of national income, against research and development (R&D) intensity, a measure of the share of national income devoted to innovation, you find strong relationship.
I'm not arguing that R&D is the only measure of innovation, nor that it is the best. Neither am I arguing that increasing R&D spending, or spending on any type of innovation, inevitably leads to economic growth. It is easy to waste money subsidizing pointless R&D. And I'm not saying that all countries fit perfectly into one of these three categories: some, such as Singapore, combine both innovation and free-trade models. But there is a huge body of academic work supporting the basic claim that innovation matters for economic development. Unless a country has oil or suspiciously low taxes, innovation is the best route to prosperity.
Most of the success stories of economic development—from the old world of the United Kingdom and France to later developers such as Taiwan and South Korea—have involved the identification, production, and commercialization of new technologies. Policymakers know this. They use tax credits to subsidize R&D, fund expensive labs for blue-sky research that expands the frontiers of knowledge with no obvious application, and set out "missions" around which policy is supposed to focus. Innovation has become a central goal of most national governments.
But there is a problem with this strategy. High-tech innovation has revolutionized the world, but it has concentrated income and wealth in the hands of a few, polarized labor markets and led to divides between a small number of superstar cities and other regions. Inequality in advanced economies has been rising since the 1980s: the ratio of the income of the top 10 percent to that of the bottom 10 percent of earners across member nations of the Organisation for Economic Cooperation and Development (OECD) increased from 7:1 in 1980 to 9:1 in 2013.3 In the United States, between 1980 and 2017, the share of national income going to the lowest-income 50 percent fell from 20 percent to 12.5 percent.+ The 1 percent (of highest earners) have been the biggest winners, and their incomes have been increasing since the 1980s across the English-speaking world. Except in a few holdout nations, such as France, most of the advanced world has seen long-term growth in income inequality.
If the richest are gaining an increasing share of output, someone else must be losing theirs. Most of the evidence says that it is the middle classes (or, at least, middle-income earners) whose relative position has declined. The OECD investigated what happened to middle-income households, defined as those earning between 75 percent and 200 percent of median national income. Across the OECD, between the mid-1980s and mid-2010s, the share of households defined as "middle class" declined from 64 percent to 61 percent.
These macro-level problems hide a host of intersecting inequalities. Ethnic and racial inequalities have been prominent in public debate, for good reason. Racial inequalities in the United States are longstanding and stark. In the United Kingdom, the situation is different but little better, with people of Bangladeshi or Pakistani ethnicity having the lowest median household incomes of all ethnic groups. These inequalities are intersectional with other lines of distinction and discrimination. Most notably, gender wage gaps are pervasive across the "advanced" world and have changed depressingly little. Women earn less than men, even when performing the same jobs.6 Even where you live matters. Evidence shows that growing up in a deprived neighborhood or town can have a long-term impact on your living standards, even if you move elsewhere.
These inequalities- and many others that are less visible and less well reported have significant social, economic, and political consequences. If people feel their life chances are predetermined by parental income, class, gender, ethnicity, or where they live, it is hardly surprising that they may vote for populist parties that claim to offer simple solutions for these entrenched social problems. They are less likely to trust national governments, vote, or participate in civic life. And they are more likely to become rent seekers, increasing their own income at the expense of others, rather than collaborating and building the social structures necessary for a functioning economy. As a result, inequality can threaten economic success.
Yet many of the world's most important hubs of innovation, from Shenzhen to Seoul, are characterized by high levels of inequality. San Jose, California, the home of Silicon Valley, is one of the most unequal metropolitan areas in the United States. There is a clear link between employment in high-tech sectors and localized inequality. Oxford and Cambridge are two of the most unequal places in the United Kingdom, despite their success in innovation. The new products and processes created in these cities are producing real economic gains, but those gains are not shared among all residents.
The fact that innovation is vital for economic success but often linked to gross inequality is a challenge for policy and society. But growing inequality is a general trend, not a universal law. There are significant national and regional differences in both the magnitude of increases in inequality and their patterns. For example, while the income share of the top 1 percent of earners has increased in the English-speaking countries since the 1980s, it has remained flat in much of continental Europe. Growth since 1980 hasn't benefited those with below-median incomes in the United States, but in Western Europe the poorest 50 percent have seen their incomes rise by 40 percent (in contrast to a 3 percent increase in the United States). The United States is richer than Europe, but the bottom 50 percent of the population earns around 15 percent less than the equivalent group in Western and Northern Europe.
Such divergent trends are difficult to reconcile with the conventional explanations for inequality, which center on the differential impact of technology on workers depending on their particular skills, and the pervasive impact of trade with less advanced economies. The universal pressures caused by technology and globalization do not play out the same way in all countries. National institutions and policy choices matter in moderating the effects of these changes. Plenty of prosperous economies have managed to grow without succumbing to the high levels of inequality of the English-speaking world.
Looking Beyond Silicon Valley
When policymakers aim to boost innovation, they search for models from the most innovative places—and from one, Silicon Valley, in particular. Countries from Saudi Arabia to Vietnam have attempted to emulate its success by building business parks in deserts, setting up state-backed venture capital funds to support disruptive innovators, and investing in high-risk innovation agencies. A cliché of Silicon Valley has inspired countries all over the world to develop their own Silicon-Somethings, from Kenya's Silicon Savannah to the United Kingdom's Silicon Canal (Wikipedia lists eighty-one examples). Innovations from the San Francisco Bay Area have shaped the world, from Google's search engine to social media platforms such as Twitter. The Silicon Valley model of innovation policy is itself one of these, and it has gone viral.
Yet for all its success, the Silicon Valley model of innovation is highly problematic. The Bay Area is home to many important tech startups, but there are homeless encampments on its streets. The United States may be the home of more tech unicorns (privately held startup companies valued at over US$1 billion) than any other country, but its life expectancy has been falling. GDP has grown, but the middle classes have declined. The most successful startup founders have made billions, but real wages for the least well-off Americans have not increased since 1979. Some scholars have argued that Silicon Valley has concentrated investment in superstar cities, locking in regional inequalities.
Other examples are similarly troubling. South Korea has become one of the world's leading producers of advanced technologies such as smartphones, but it struggles with stagnant wages and gross inequality (if you doubt this, watch some of its most famous media exports: Parasite, Squid Game, and even "Gangnam Style"). The capital city, Seoul, dominates the economy so much that the government is pushing for more balanced national growth. The UK model—less innovative, but still important for policymakers internationally—has strengths in higher education, but spinous from Oxford and Cambridge concentrate the benefits in already affluent parts of the country, while high house prices squeeze the real wages of those who live there.
The Silicon Valley model of radical innovation, startups, and elite, exclusive universities does not lead to broadly shared prosperity. This problem has been noted in the classic texts about Silicon Valley. In one of these, UC Berkeley's Annalee Saxenian highlights the problems of less-well-paid workers in factories who were being priced out of affluent areas. Bennett Harrison has argued that the widespread view of Silicon Valley as a center of global tech often ignores problems of inequality and disadvantage. Yet researchers and policymakers have too often assumed that this inequality is inevitable. Focusing on Silicon Valley alone has led us to conclude that a truly innovative economy comes at the price of high inequality.
Innovation policy is fixated on the basic question of how to increase innovation. The answers matter, of course, and should provide a foundation for policy. Yet there is no point being "one of the most innovative countries on earth,” “a leader in the fourth industrial revolution,” "winning the global race for innovation"—or whatever hyperbole is currently in fashion—unless innovation translates into broadly shared prosperity. The US model, despite its great strengths, is problematic: the true purpose of technological leadership is not to win Nobel prizes or develop the most disruptive technology but to increase living standards. Policy for innovation should aim to create good jobs and ensure prosperity is widely shared. Innovation itself is vital but only half the answer.
While there are many studies on innovation and inequality, most of these are attempts to look at where one leads to the other, whether by considering the impact of technological change on labor markets or by studying the divided labor markets of high-tech hubs. In this book, instead of looking at cases where innovation drives inequality, I focus on places where it is a more positive force: where innovation leads to widely shared prosperity.
My approach challenges the conclusion of US studies showing that innovation inevitably results in high levels of inequality. My core argument is that, too often, innovation policymakers ask the wrong question and then look for answers in the wrong places. In addressing the question of how to increase innovation, they focus on models from places such as Silicon Valley, drawing up shopping lists of policies that are then haphazardly transplanted to other parts of the world. It is hardly surprising that these policies fail so often to increase the welfare of people in the national and local economies in which they are applied.