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Quotation of the Day…

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… is from page 269 of Amar Bhidé’s excellent 2008 book, The Venturesome Economy [2] (original emphasis; footnote excluded; link added):

[C]ommercially successful innovations usually enrich more than just the innovator.  For instance, new products and services also generate a consumer surplus – value to their users in excess of the price.  If they didn’t, why would a consumer ever take a chance on a new product or service?  The distribution of value between innovators and users also is noteworthy.  Successful innovators (and their investors) can secure extraordinary wealth, whereas the total dollar value of an innovation secured by a user is often quite small; therefore, it is tempting to think that innovators are the main beneficiaries.  But users outnumber innovators by a wide margin.  Moreover, according to [William] Baumol’s analysis [3], a competitive, free market system provides a positive but small share of the gains to the innovator, whereas the users get the rest.

People who fret over economic inequality are especially encouraged to keep also in mind that many innovations, even those that make the spread of monetary incomes wider (that is, less equal), make the spread of access to goods and services narrower (that is, more equal).

For example, the innovation by Fred Smith of FedEx [4] that made overnight letter and package delivery affordable to middle-class Americans also made Fred Smith a hugely wealthy man.  And this innovation likely increased monetary-income (and monetary-wealth) inequality in America (and in the world).  Yet not only did this innovation improve ordinary people’s living standards, it made ordinary people more equal to the superrich in terms of access to speedy delivery and receipt of letters and packages.  Before affordable overnight delivery, the superrich and the politically powerful could afford to ship, and to receive, letters and packages delivered overnight.  If in, say, 1970 Howard Hughes just had to send a love-letter or a box of chocolates ASAP to woman a thousand miles away from him, he could afford to pay for a plane and a pilot to perform the delivery.  Likewise, the President of the United States no doubt had no difficulty sending letters and packages across the country or the globe for overnight delivery.  But no ordinary American could afford such a luxury.  Today, in vivid contrast, speedy delivery is within the reach of nearly every American.

And so a germane question is suggested: even if Fred Smith’s innovation unambiguously increased monetary-income (or monetary-wealth) inequality, did this innovation increase economic inequality (properly reckoned)?  My answer is ‘no’; this innovation decreased economic inequality by making consumption possibilities more equal.

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