The complex inequality-innovation-public investment nexus: What we (don't) know, what we should, and what we have to do

By Alberto Botta

PKES Working Paper 1506

April 2015

In this paper, we deal with the complex relationship connecting inequality to innovation, and the ways through which public investment, in particular public participation to R&D initiatives, can affect it. We first stress that various different equilibria may exist in the inequality-innovation space. The positive relation that part of the economic theory often assumes to exist between (initially) rising inequality and improving innovation performances emerges as only one among many other far less virtuous dynamic trajectories. We then analyze the specific case of the US. We put emphasis on the possible perverse effects that the financialization of the US economy may have on the inequality-innovation nexus. We also note that the US developmental State – very often neglected by the economic literature – can effectively mitigate such undesirable outcomes. According to our interpretation of recent developments in the US economy, the widespread belief in the positive pro-innovation effects of fierce cutthroat remuneration systems may prove to be ungrounded.

Keywords: Inequality, innovation, financialization, public investment, developmental state

JEL classification: O15 O16 O31 O38