High income and wealth of the rich is ultimately the reflection of their higher productivity and innovativeness, says classic economic theory. More and more economists are questioning this paradigm, with some important potential implications for the mix of fiscal, social and innovation policy.

Joseph Stiglitz has long been involved in the 1% vs. 99% debate both in the US and globally. As a preview of his upcoming book, The Price of Inequality, he gave an inspiring interview to Vanity Fair this week. Although the topic of inequality is much wider than simply innovation, the links he made with the two are more than interesting.

In a nuthsell: he disagrees not only with the idea that greater inequality will make the rich invest their greater wealth or income and thus improve the economy, but also with the belief that their wealth is proof positive of their contributions to innovation.

On the contrary: Stiglitz deems that inequality hampers economic growth and creates instability. Moreover, the extremely wealthy do not use their money to take innovation-driving risks but rather use it is to engage in rent-seeking, in other words, influencing public policies to their own benefit.

As Stiglitz puts it: “the real drivers of growth and innovation are young businesses and small- and medium-sized businesses, especially in high-tech areas, typically based on government-supported research”.

Of course, Stiglitz has already touched upon the issue in his previous writings. But his message appears to be more explicit and stronger than before:  reduce inequality (probably by making the tax system more progressive) and support SMEs and start-ups to foster innovation and growth.  He is not the first economist to make such a statement, either, though he is probably among the most influential thinkers to do so. The list of like-minded economists is growing.

It is hard not to recognize that this debate has its relevance for Europe as well.  OECD’s recent report clearly showed that inequality has been rising in Europe in the recent decades to a level that needs to be reduced. At the same time Europe needs to regain its global competitiveness, but she is lagging behind the US (and other major countries) in the field of research and innovation according to many performance measures. We are desperately looking for new sources of economic growth.

A good innovation policy will have to be based on a holistic vision about how society as a whole works and in particular about who and how contributes to research, inventions, innovations and ultimately economic development. And an innovation-focused fiscal policy will have to take into account these aspects in its tax regime and in its research or innovation related spending choices. The 1% vs. 99% debate was originally a social one, but it has a very strong productivity dimension as well, which received so far less attention.

No ready answers are on the horizon that can be easily translated into policy decisions, but these discussions are nevertheless very much needed, most likely also on our side of the Atlantic. It is a safe bet that Stiglitz’s book will be a good read for the summer.