Inequality hurts innovation by removing the resources and education necessary

A number of researches study the impact of inequality on innovation through price- and/or market-size effects (Foellmi & Zweimüller, 2016). On the one hand, price effect implies that inequality positively affects innovation, because willingness of rich consumers to pay high prices for new products allows innovators to increase the mark-ups that increase their incentive to innovate. On the other hand, inequality shrinks markets for new products, as only a small number of consumers can buy them. Thus, inequality negatively affects innovation. Whether inequality enhances or weakens the innovation depends on the relative importance of these price- and market size effects.

Inequality can reduce also a number of people capable of investing in innovations, which also can have a negative effect on innovation.

Inequality reduces also access to resources, which negatively impact on innovation. There are a number of studies according to which concentration of resources positively affects innovation. In particular, the Schumpeter hypothesis suggests a positive correlation between concentration of companies in the market and innovation. It is also argued that concentration of resources allows innovative individuals to amass the necessary resources they need to innovate. However, on the other hand, there is often a situation where firms possess promising innovation ideas, however, as they don’t have access to financing and other resources, these ideas remain unrealized. In some cases, these firms find themselves being absorbed by large companies through acquisitions, but as large companies mainly focus on incremental innovations and are less inclined to radical innovations, it also may hamper innovation. In particular, Baumol (2005) argues that as radical innovations are mostly created by independent innovators and entrepreneurs, while large corporations mainly focus on incremental innovation, concentration of R&D in the hands of corporations could decrease radical innovation. Therefore, a policy providing equal access to resources promotes rather than hamper innovation.

The negative impact of inequality on innovation is also caused by the negative effect that inequality has on a country’s education level. Education has a positive impact on innovation as it not only provides competence and analytic tools but also can stimulate creativity and imagination and allows absorbing and translating the available knowledge into innovations; and as the poor tend to have less capability to attain a decent education for themselves and their children than an average person (for example, some researches show the poor graduating from high school are less prepared for college level work than others (Ireland, 2016), increase in poverty negatively affects country’s capacity to innovate.

Inequality increases also negative societal phenomena, which also negatively affect education. Inequality diminishes the quality and time reserved for parenting and increases the risk of personal trauma to the child. As a result, a child suffering from inequality is unable to study well. Thus inequality negatively affects education, in turn reducing country’s capacity to innovate.

A number of studies argue that inequality is necessary factor in increasing innovation, as it increases motivation to engage in innovation (Acemoglu, Robinson, & Verdier, 2012). However, most psychological theories on motivation, in particular, Maslow’s Hierarchy of Needs, argue that people have self-actualization needs such as utilizing and developing talents and abilities, creativity and curiosity, and these needs are a higher goal of a human activity than material wealth. Therefore, improving access to education and resources is more important in increasing innovation activity. Bhaduri and Kumar (2009) in researching the motivations of innovative behaviour in India find that purely extrinsic motivations (such as financial outcomes) drive only a fraction of innovative behavior, and intrinsic motivations are the most important driver of innovation behavior.