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.