Innovation and inequality: the separability thesis.

Author:Epstein, Richard A.
Position:Thirty-Fourth Annual Federalist Society National Student Symposium

The topic of this Essay concerns the interaction between innovation in areas of intellectual property on the one hand and the demand for greater equality of income and wealth in society on the other. Whatever one thinks of the latter objective, I think that it is a social mistake to link these two separate topics together. The correct approach is instead sequential. First, develop a set of rules that promotes the maximum level of innovation. Once that innovation question is settled, address inequality in income and wealth from a broader perspective-one that does not develop special rules to deal with intellectual property issues. I call this the "separability thesis."

In making this claim, I do not wish to insist that the problem of inequality, which for many people is the dominant social challenge of our time, does not matter. Instead I want to address the related question of whether inequality is addressed better by private or public means--to which my own answer is that decentralized private activity, buttressed by a charitable contribution deduction, will on balance work better than any modification of intellectual property rights. Hence I would argue that inequality matters but is better addressed separately from the question of innovation.

I think that the Essays of Professor John McGinnis (1) and Beth Kregor (2) strengthen the case for the separability thesis.

In his presentation, Professor McGinnis speaks about the huge power of intellectual property to speed up the leveling of wealth and opportunities across people in different social strata. His central point is that the rapid reduction in the costs of standard technologies--think smartphones and social media--increases the opportunities for personal advancement of those who are at the bottom of the income distribution. Lower prices give greater access to all, producing higher levels of overall social satisfaction, even if, as Adam Smith's invisible hand reminds us, that consequence was not part of the innovator's intention. (3) The innovator's own self-interest aligns with a desirable social objective. (4)

The more controversial portion of McGinnis's thesis is that the pace of innovation will insulate the new technological industries from the heavy hand of government innovation. In general, I think that his prognosis is overly optimistic, because resourceful and determined governments can always initiate anti-competitive regulations no matter what the present level of technology by focusing on its most vulnerable components. To give a simple example, companies like Uber and Airbnb do not just operate in an online environment. They have to deliver their rides and their accommodations in physical space, where they are vulnerable to regulations. Hence, it is possible for a single mid-level administrative official to attack the Uber business model that treats its drivers as independent contractors and not as employees--a status that is right now under serious legal challenge. (5) Airbnb must arrange for its customers to have rooms, which in turn could subject individual owners to various restrictions and hotel taxes, which Airbnb actually wants to collect itself in order to gain legal legitimacy. (6) And, of course, it must worry about serious issues such as zoning laws and landlord restrictions as it runs its business. (7)

It is not possible here to comment at length on the soundness of these various taxes and regulations. But that lack of specificity does not in my view undermine the essential argument for the separability thesis. Do not use regulation of specific firms or industries to secure redistributive ends. Indeed, it is critical to note that innovation can be socially valuable even if it does not result in higher levels of income equality. The argument runs as follows: Greater access is a byproduct of greater innovation, as are the benefits to those at the bottom of the income distribution. Yet by the same token, it is not clear that greater equality follows. It could well be that the informational elites gain more than individuals at the bottom of the income distribution. But therein lies the rub: any consistent Pareto improvement is less problematic than any forced redistribution, and these Pareto improvements often occur by increasing inequality. (8) Somebody who buys a computer may go from ten to a thousand, but the computer manufacturer may go from a million to a billion dollars. Both are improvements. If the inequality barrier is pushed too hard, it dampens the entire improvement cycle. Even for the foes of inequality, industry-specific interventions are always a mistake because the issue can be addressed separately without destroying this Pareto improvement.

The concern that Ms. Kregor voices goes in the opposite direction, for she talks about the displacement effect that innovation has on those persons who are at the bottom of the economic ladder. Again, this topic is not unique to the area of intellectual property. Anyone who has paid the slightest attention to the debates over tariffs and unions knows that this fundamental tension plays itself out whenever there is a change in relative wages and prices. (9) In some cases, it comes from new sources of goods and services, and, in others, it comes from innovation that displaces jobs. But here, too, it is important to note that any study of displacement that looks only at the negatives seriously underestimates the complexity of the overall situation. The displacement of some jobs results in the ability to produce a new (and improved) suite of products at lower prices than before, which in turn opens up opportunities for entrepreneurs and businesses to enhance their own competitive positions, not only in domestic markets but in foreign markets as well. The loss of jobs comes as a hard blow to many, but the opportunities that they receive for employment in new industry sectors cannot be ignored in the larger scheme of things. Nor is there any reason, if displacement does justify some form of transitional aid, that the case is more compelling in the context of displacement through innovation in intellectual property than it is in the context of foreign competition in goods or services that comes from the dismantling of tariff barriers, import quotas, or other protectionist legislation.

In many cases, the concern with inequality does not express itself as the difference between the top one percent and the rest of society. Instead, in good populist fashion, the challenges are against those few "billionaires" who have acquired their massive wealth through innovation. (10) What is striking about these innovators is the quickness with which they amass their fortunes--often only in a matter of months or years. But there are again several points that ease the ostensible pain in these issues. First, it is generally the case today that the billionaires are the innovators and not their children or other descendants. Lest anyone doubt that conclusion, it is well to reflect that John D. Rockefeller was hugely rich--indeed far richer relative to his time than any billionaire is today. (11) Yet time takes its toll. A look at the Forbes list of the top 500 wealthiest individuals in the United States contains no Rockefeller, as the original John D.'s huge fortune has been spread by inheritance over multiple generations across a large number of individuals. (12) Indeed, the top places on the list are all occupied by individuals like Bill Gates, Larry Page, Sergei Brin, and Mark Zuckerberg, who have made their own fortunes after starting from relatively modest circumstances. (13) Clearly, the great wealth at the top of the distribution increases inequality of wealth. But in my view that profound change is a reason to rejoice rather than to lament. I see several reasons for doing so.

The first point in this analysis is that wealth, especially wealth at those great levels, is a very poor proxy for human well-being. The point is missed, for example, in Thomas Piketty's Capital in the Twenty-First Century, (14) which enjoys a hero's welcome from such Nobel Laureates as Paul Krugman and Joseph Stieglitz, (15) only to have lost its popular cachet in recent months. (16) The key question is how well the inequality of wealth correlates with the inequality of overall well-being. On this measure it is critical in all these cases to take into account the various forms of nonpecuniary benefits that people have--for these can never be concentrated in the few fortunate individuals at the top. (17) In its simplest form, the observation is that good health is as important to happiness as is great wealth. As a rough guess, it is not unreasonable to say that these full sets of nonpecuniary advantages are at least as important as the pecuniary ones, so that severe deprivations in social companionship or health count as much in their own way as high levels of poverty. On this score, life expectancy is of huge importance, as is infant mortality and a host of other measures. Quite happily, it is not possible to confine these critical benefits to any thin fraction of the population. The first round of major modern advances, say between 1850 and 1900, constructing sewers and fighting contagious diseases, and the close connections between them, were chiefly financed by the wealthy because the poor lacked the financial resources to contribute much to these infrastructure improvements. (18) But the benefits of these activities are widely dispersed throughout society as one of the most vital public goods. There is no way that average life expectancy in the United States, for example, could go from about 46 in 1900 to about 79 today (19) without some broad-scale distribution of the social benefits from increased longevity.

It is, of course, still better to be...

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