gracchusdixit

An article recently appeared in the New York Times with the title: “Why Can’t America Be Sweden?”  It discusses the work of three economists, two American and one French, who argue that any attempt to adopt the more equalitarian income distribution that exists in most of northern Europe would undermine America’s technological leadership and, ultimately, the entire global economy, which depends upon our leadership.

Their argument is grounded in three assumptions: (1) the United States is, in fact, the world’s innovation leader; (2) our leadership depends upon individual entrepreneurial success; and (3) the successful entrepreneurial spirit requires what these economists call “differential rewards,” i.e., the ability of entrepreneurs to make a lot more money than anyone else.  To quote one of these economists directly:

“…a greater gap in income between successful and unsuccessful entrepreneurs increases entrepreneurial effort and thus a country’s contribution to the world technology frontier.”

There may be many reasons why America can’t be like Sweden, but this isn’t one of them.  Like so much of the babble in our public life, the assumptions made by these economists are little more than myths.  Such myths may be satisfying to our national ego, they may help to advance a political agenda, but they do not pass for truth.

The truth is that no economic evidence exists to establish a correlation (let alone a causative correlation) between income inequality and innovation.  On the contrary, the reverse is the case.  Most of the evidence indicates that a flatter, more equalitarian income distribution, embodied in a large middle class, does more than anything else to stimulate both growth and innovation.

If you stop and think about it, this is nothing more than simple common sense.  When opportunity—and that’s all income really is—is distributed widely, more people have a chance to contribute their brains and talents to the greater economy.  The contributions of a few brilliant and lavishly compensated individuals cannot possibly make up the difference.

Furthermore, the assumption that innovation is the product of individual entrepreneurial effort, spurred by “differential rewards,” is simply untrue.  Maverick and “differentially rewarded” entrepreneurs like Bill Gates and the late Steve Jobs are immensely popular icons, but they do not represent the major source of technological innovation.  Last year, more than a quarter of a million patents were awarded in the United States.  Ninety-five percent of these went to corporations, universities, and government agencies or departments; merely five percent went to individuals.  And by the way, most of the universities on the list were public institutions, not the richly endowed private universities of the Ivy League.

An even bigger myth is the assumption that the United States is, in reality, the world’s innovation leader.    INSEAD, one of the world’s largest graduate schools of business, publishes an annual Global Innovation Index.  Last year, the United States ranked 10th, not first, and a majority of the patents mentioned a moment ago were issued, not to Americans, but to foreigners, particularly the Japanese.  Indeed, seven of the top ten patent-winning entities were non-American.

The final and most damning myth is the claim that the social mores of more equalitarian countries like Sweden stifle innovation.  This is patently false.  Sweden ranks 2nd on the Global Innovation Index, Finland ranks 4th, and Denmark (with the least “differential” income distribution in the world) ranks 6th—all well ahead of the United States.

When it comes to innovation, the “socialists” seem to be doing fairly well.  Instead of drugging ourselves with self-satisfying myths about our “entrepreneurial spirit,” perhaps we should wake up and learn from their example.