Wealth and Innovation: The Freedom to Do Cool Shit

If there’s (only) one thing that macroeconomists agree on, it’s probably that innovation and entrepreneurship are the driving forces behind the vast improvements in well-being that we have seen over the decades, and over the centuries. (It’s also what’s allowed for some of the most heinous acts imaginable. But still.)

I pointed out in a previous post that 1) wealth inequality is extreme in America, dwarfing both income and consumption inequality;  2) it varies greatly between OECD countries; and  3) in comparing those countries, over the long term wealth equality seems to correlate very strongly with growth in GDP per capita.

Why the correlation? In particular, does widespread wealth distribution promote innovation and entrepreneurship?

I’m going to punt on answering that question empirically because the paucity of data–and even more so, the difficulty of proving causation–is pretty insurmountable.

But I do have a personal tale to tell, one that some might find representative of a general rule, and hence somewhat convincing.

When I was 32–back when I still had the fire and drive for startups–my father died and I received a low-six-figure inheritance. It was nothing like retirement money, but it was a very comfortable cushion for someone earning in the mid-to-high five figures.

Within a year, I invested a nontrivial portion of that inheritance (along with a partner) into launching a new business. I also invested an insane amount of work that I could have devoted to guaranteed income. (Read: large opportunity cost.) It worked out very well for all involved.

Without that inherited wealth, I would not have had the financial or emotional freedom to start that business. (I had a new baby at the time, and a second one turned up within two years.) Having a solid nest egg in the bank gave me the confidence I needed to take a chance–not only risking some of the nest egg, but putting aside the reliable income I was generating (and reducing the likelihood of future reliable income), in return for a large possible upside.

To say it another way that puts across what it actually felt like at the time: that nest egg gave me the psychological space to go off and do some really cool shit, without worrying that failure would hurt my family significantly.

So why does wealth equality correlate with growth? I think it’s because many more people have that space to take risks and innovate. In this case the “incentive” is actually a removal of limitations–the limitation being a widespread lack of wealth that is arguably encouraged by a free-wheeling, cut-throat, competitive economy. It’s hard to overestimate the power of millions of people who have that kind of space and freedom to innovate.

This data-free surmise is supported to some extent by the previous post on wealth inequality. In the short term, concentration of wealth seems to correlate with faster growth. That’s in keeping with traditional economic models. But in the long term–where even fairly modest generational wealth like my father’s can have its sway–widespread distribution of that wealth removes limitations on millions of eager young strivers, resulting in the kind of risk, innovation, and success that I am so lucky to have experienced.

I’m making no statements (here) as to what we might do to promote that kind of wealth distribution. But I am saying that it should be a goal, one that we should seek to effectuate when we can do so without significant short-term damage to our economy. Not only is it more fair; it makes us all better off in so many, many ways.

Give ten million, thirty million more American a place to stand, and they’ll move the world.






4 responses to “Wealth and Innovation: The Freedom to Do Cool Shit”

  1. Mayson Lancaster Avatar
    Mayson Lancaster

    This hypothesis is further substantiated by the
    wide success of microlending schemes: lack of access to capital is a profound barrier to economic progress.

  2. joecanuck Avatar

    I’m not sure if your anecdote proves your point. More redistribution would probably involve higher income taxes on people earning mid to high 5 figure salaries, and people receiving 6 figure inheritances. Wouldn’t those higher taxes impede entrepreneurs? It’s hard to imagine a level of redistribution high enough such that entrepreneurship is available and (relatively) risk-less to average people.

    on the other hand, I do see your point. Some risks do really prevent people from starting businesses. Without some sort of universal medical insurance, many potential entrepreneurs are unwilling to leave their current jobs. They just can’t risk the health of their families. Something similar is probably also true when it comes to school access.

  3. Asymptosis Avatar

    joecanuck :

    Thanks for commenting, Joe. Nice to see people thinking both sides of questions.

    I’m here to tell you that if other entrepreneurs are anything like me, a 39.6 top marginal rate (compared to 36%) is not going to discourage them, nor is it going to prevent someone who’s getting a (slightly smaller) mid-six-figure inheritance from starting a business. Again: if they’re anything like me.

    I used less than ten percent of that inheritance to start the business, but having it there is what gave me the confidence to do so.

    I think the same would be true with much larger inheritances, but to a greater extent.

    And as for business owners *expanding* their businesses, look at what they say: shortages of financing and capital are the *very last thing* on their list of business constraints.


    It’s not “financing” they need–it’s a backstop in the bank to give them the comfort level. Because lemme tell you–and this is born out by endless studies–successful entrepreneurs are not really about risk-taking. The ones who succeed are like me and my partner and previous partners–constantly terrified of the downside, and constantly protecting against it.

    What they need is sales. Which means aggregate demand. Which means redistribution to fuel that demand from the bottom up. Because technology and corporate capitalism are spectacularly powerful pumps to fuel and grow the economy, but they inevitably, overall, pump in one direction: upward.

    Totally agree on health care. I don’t hear economists talk nearly enough about labor-market flexibility and health care. By that they generally mean employers’ ability to hire and fire at will. But they don’t think nearly enough about employees’ ability to move to a better job or start their own business. Employer- (and state-) based health care is a huge impediment to that, and economists almost universally agree that labor market flexibility is a crucial driver of prosperity.

  4. […] For those who care to hear a personal account of how modest, widespread wealth dispersal can encourage innovation, entrepreneurship, and wealth-creation, see here. […]