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Tuesday, July 24, 2007

Income Inequality and Technology Creation

Ultimately, knowledge and technology make us richer. From high food yields in agriculture to safe, fast, comfortable cars, to the coolest mobile phones, to robot vacuum cleaners, to the latest special-effects wizardry in the movies, virtually every service and product we consume contains a great deal of knowledge and technology.

But how does knowledge and technology get created? As I wrote in "In the Knowledge Lies the Wealth":
...[knowledge] comes from two sources: people with a need for the knowledge create it out of thin air (necessity is the mother of invention) and from people sitting around thinking with interest in some topic but with no particular need. The first type of knowledge creation I call "pull knowledge" because I think it's similar to "pull content" on the Internet. Pull content is content that someone goes searching for on the web and they "pull" information from the sites that contain the knowledge that is interesting to them. As that person is searching, they encounter advertisements and other "push content" that's "pushed" on them. The person who sits around and thinks new thoughts needs to then push the new knowledge out into the world for it to have any effect. As a result I call that sort of knowledge creation "push knowledge." Product development requires pull knowledge creation. Basic research is push knowledge creation.
Product development is driven, in turn, by (expected) demand. That is, some entrepreneur or business entity predicted that they could develop a product that would have sufficient demand to support a high enough price across adequate volume to produce profits.

Not all demand is equal and not all product development produces the same quantity of new technology and knowledge. Some new products are just the repackaging or remarketing of existing technology or incremental improvements that make a product a little cheaper but do little relatively little to push the state-of-the-art. On average, it's the demand for truly new products that create the largest increase in the formation of knowledge and technology.

That demand comes primarily from the wealthy.

Almost every new, modern product class you can think of was first sold to the relatively rich (and/or a business entity). The electric light, personal computers, gigantic flat screen HDTVs, stereos, microwaves, washing machines, cruise-control, electric windows, air bags, anti-lock brakes, cell phones, pianos, noise cancelling head-phones, digital watches, indoor plumbing, central heating, air conditioning, powered lawn mowers, vacuum cleaners, and on, and on, and on.

Income inequality concentrates wealth. The concentrated wealth provides significant disposable income in a portion of the populace that creates demand for high end products. The technology for many of those high end products does not yet exist and is very expensive when first developed. This demand then "pulls" the technology into existence by incentivizing people to invent it.

Once a product has reached saturation (everybody owns one) for a significant period of time, there's little room left for innovation. Those with limited disposable income (at the low end of the economic spectrum) buy only these products and have limited remaining disposable income for new products.

Once the wealthy provide the initial market for a product, the natural evolutionary product cycle makes it cheaper and cheaper, each stage providing incremental new technology, until far more people can afford the product (or a competing one).

The wealthy and income inequality thus serve all of us well over a long period of time.


Oroborous said...

Although the dynamic can be productive, the question is, how much income inequality is good, and at what point does it tip over into being destructive ?

Obviously, if one person held 99.9% of all wealth, that would be bad, although she could buy any new toy or gadget that hit the market.

And possibly, it would make things tougher for the entrepreneur if everyone held an equal share of the nation's wealth, as perhaps more-marginal inventions or refinements would fail to appeal to enough people.

But according to the U.S. Census Bureau, among Americans households today, that are headed by a person who worked full-time for an entire year, the disparities in income between the 75% of the population that falls in both the top 80% and bottom 95%, is a mere 4.5:1, practically socialistic.

So if we are to say that the America of today is optimally suited to the introduction of new services and products, then we're also by default saying that the level of income disparity necessary to produce such results is "not very much".

Bret said...


Are you saying income disparity in the United States is "not very much"?

I agree that the current level of income disparity is adequate to help stimulate innovation.

Oroborous said...

Income disparity in the U.S., among people who work, is QUITE low, at least as measured by the U.S. Census Bureau.

That includes all minorities and any other potentially oppressed groups.

Income disparities between people who work, and those who don't, is of no concern to me, as long as people aren't being denied the opportunity to work for social or structural reasons, which isn't the case in today's America.

Harry Eagar said...

Well, if you pick high-end, complicated products, obviously only the well-to-do will be early adopters.

If you had picked canned pineapple, pickles, machine-sewn shirts or things like that, the early adopters would have been of modest means, or even poor.

Bret said...


Most new products are complicated. They start as high end, then become inexpensive via the process I describe. Examples include cell phones, TVs, etc. as I mentioned in the posts.

Regarding canned pineapples, etc. Let's say there was no income inequality. Would pineapple technology increase materially faster? Probably not, since there is already a substantial market and innovations are happening pretty slowly. In tree fruit, where I work on robotic harvesting, pruning, etc., the current demand to drive the funding of this sort of technology.

So I don't see income inequality reducing the demand for new technology in those sectors that are already mature. In fact, if anything it increases it, because we can only do the robots because other high end products (such as cell phones) have caused the cost of computation to drop precipitously.

Harry Eagar said...

Not all economic gain comes through invention of complicated, expensive machinery.

My brother, the welder, points out that a fractional gain in welding efficiency would add as much to the world product as inventing a big new industry.

Thomas Jefferson said the same when he observed that the man who did most for his country was the one who introduced a new, useful crop.

TJ put his money where his mouth was by smuggling upland rice seed out of Italy, a capital offense in the Duchy of Milan.

It's true that expensive, complicated innovations keep opening up new areas of the economy.

There was a study in the Journal of Economic History years ago that compared the cost of moving freight inland from the US and Mexican coasts around 1840. The Americans used railroads, the Mexicans mules. The cost was a wash.

Obviously, the railroad business offered more scope for development than the mule business. The Westinghouse air brake was eventually worth more than an improved mule shoe.

On the other hand, Goodyear's process did not involve any very high end product initially.

Bret said...

harry eagar wrote...

"Not all economic gain comes through invention of complicated, expensive machinery."

Agreed. My point was simply that some types of invention are more stimulative than others.

"My brother, the welder, points out that a fractional gain in welding efficiency would add as much to the world product as inventing a big new industry."

I suspect your brother, the welder, might be biased. Many industries (for example, automobiles) are nearly trillion dollar industries. Certainly a fraction of welding isn't worth a trillion dollars a year? I'd like to see the numbers to back your brother's claim up.

"On the other hand, Goodyear's process did not involve any very high end product initially."

Agreed. That was a long time ago when the technology landscape was different, but it's certainly true that even today some low technology inventions are created for the masses, some of which have significant positive impact on knowledge and technology. I'm just saying that it's also helpful to have a richer segment of the population to also drive high end, high technology inventions.

Harry Eagar said...

You'd be surprised, maybe, how much the world spends on welding, or as Professor Eagar calls it, joining.

Anyhow, I've never been worried that we will have a shortage of rich people or that they will be unable to look out for themselves.

Harry Eagar said...

I have now had a chance to gather some examples.

It occurs to me that three of the most economically productive innovations of the modern era were radar, the transistor and the structure of DNA.

Not one was inspired or driven by the lusts of the rich.

Radar was military. DNA was worked out in Britain at a time when the rich paid supertax of 98%.

The transistor is a little more complicated. The goal was to reduce the cost of telephony. Now, in the late '40s, long-distance calls were an extravagance for a lower middle class family like mine (compared to a 3-cent stamp), but hardly luxury goods.

And the calls themselves were the outcome of telephony, perhaps the single most productive innovation since farmed food. And while that required the income inequality that allowed Bell the space to experiment, his goal was not to cure deaf rich people.

Approached from the other end, it would be hard to find more income inequality than in Nigeria, whose contributions to economic innovation have been -- and are likely to continue to be -- 0.

Russia up to 1914 had plenty of income inequality, too, but although some of it ended up in research science, most of it went into Faberge eggs, and I cannot think of a single economically productive innovation that came out of Czarist Russia, even though it was, in aggregate, the fifth largest economy in the world.

Bret said...


I think that income inequality is a necessary, but not sufficient condition for some very important classes of innovations, but not necessarily all innovations. So it's certainly possible to find examples of societies with large income inequalities and little innovation. It's also possible to find innovations that are not completely dependent on income inequality.

But still, you have to be careful here. Inventions and innovations are built on top of others so your examples (which confuse me a bit) may still have been enabled by products that started for the wealthy. For example, I believe (but am not sure) that radio and radar shared technology and radio initially was affordable only by the upper portion of the income spectrum.

The telephone was another example of this. The wealthy (along with government and some businesses) owned the first telephones. Without the market for the wealthy, the telephone would never have existed commercially (or at least not until much, much later), and the transistor would not have been invented when it was. So I think the example of the telephone is a fantastically good example for my hypothesis.

The structure of DNA was not invented (except possibly by some deity), it was discovered, so I'm not sure how that was an innovation. And it seems to me that many of the innovations following the discovery of the structure of DNA were aimed at markets consisting of the better of than average. The poor are neither able to afford the drugs (like chemo) directly or the insurance for such things.

Harry Eagar said...

As for DNA, the motivation for the elucidation of the structure was entirely non-commercial in intent. No one expected it would have any economic value. A complete surprise.

I think you are wrong about the telephone. Early adopters included the rich, but the real go-getters were doctors (who gained greatly in efficiency in the days of house calls) and dry-goods merchants. Not poor, but hardly to be counted among the overprivileged.

And cowboys. At the XIT, the world's biggest ranch, cowboys carried handsets in their saddlebags with magnetos. They would hook them to the barbwire and were able to shout simple messages back to the ranchhouse. The first mobile phones, and these were adopted at least as early as, if not earlier than, the installation of phones in mansions.

Radio is sort of in the middle ground. The original adopters were the military and ships at sea (recall the Titanic). Again, not a luxury item. The early crystal days were open to any kid with modest income, so long as he was willing to build his own set.

It's true that the early off-the-shelf radios were fairly expensive. But those were trailers, not leaders, in the development of radio as a commercial technology.

I'm not denying that luxury trades have great utility. That was the theme of Braudel's history of capitalism. He concluded that the grain trade dwarfed all others together in the early period of free capitalism, but had little impact on its development.

But as a predictor, the demands of the rich are not so helpful. In the past 30 years, the rich have invested at least hundreds of millions of dollars in improving sailboats. I could live without that.

Bret said...

harry eagar wrote: "...the real go-getters were doctors...and dry-goods merchants..."

Doctors and merchants weren't relatively rich?

I wasn't clear on my definition of wealthy. I consider anyone in the upper quintile of income or wealth or both to be wealthy. Doctors and merchants occupy that space. Note that I agreed with oroborous that the income inequality doesn't necessarily need to be extreme.

harry eagar also wrote: "But as a predictor, the demands of the rich are not so helpful."

I'm not sure what you mean by predictor?

Harry Eagar said...

Country doctors and small town dry goods merchants were not exactly rakin' it in during the 1880s.

A lot of them might have been in the upper quintile of their local economy, but generally they were not high earners compared to city people.

By 'predictor' I just meant that you cannot make the equation rich guy=herald of innovation.

When I hear about the feelthy rich, the image that springs into my mind is not, say, Harold Edgerton but Bijan. But that's just me.

Bret said...

Did country doctors really have access to phone? I assumed that the cities were wired well before the telephone system was extended to the country. Or did they use some trick like the ranchers?

rich guy = herald of innovation was not the equation I was making. It was:

bunch of rich guys (not necessarily filthy rich) implies demand for high end products implies innovators trying to meet that demand implies developing technology and knowledge to meet said demand earlier in many cases than if they had to wait for the mass market to support the demand.

Harry Eagar said...

Small-town doctors who had a country clientele.

In Maui, for example, the first telephone went from a dry-goods merchant's house on the hill to his store in town, about 3 or 4 miles.

Similar for several places I knew of in Iowa.

In the '80s, many middle class people would live on a farm a little ways out in the country.

Country doctors were also early adopters of the Model T, frequently the first car in the county in the south was bought by a doctor.

Dr. Hampton, the doctor who delivered me, was the first person in Signal Mountain with a phone, or one of the first.