What's to blame for inequality?

Over a decade ago, Nobel laureates Daron Acemoglu and James A Robinson, together with their coauthor Thierry Verdier, contrasted America’s “cutthroat” brand of capitalism with Western Europe's “cuddly” version.

- Keun Lee

The qualities that make cutthroat capitalism more conducive to innovation, they argued, also lead to higher levels of inequality, while cuddly reward structures tend to lead to lower growth and higher welfare. Today, inequality is soaring, notably in the United States. Do policies aimed at boosting innovation risk making a bad situation worse?

In the economics literature, one can find plenty of support for the idea that technological innovation is a key driver of inequality. But another important line of thinking attributes rising inequality largely to “financialisation”, a term that encompasses the financial sector's growing share in the economy, the increasing reliance of non-financial firms on financial activities as a revenue source, and corporate governance focused on maximising dividends for shareholders, rather than investing in future growth.

My coauthor Juneyoung Lee and I recently sought to shed light on which factor has a greater role in driving inequality, so we grouped countries according to their levels of innovation and financialisation. We found the highest levels of inequality in the low-innovation, high-financialisation group, which includes a range of developed and emerging economies, such as Brazil, Spain and Turkey. Inequality was also relatively high in the group where both innovation and financialisation were substantial, including most of the Anglo-American capitalist economies, as well as Japan and South Korea.