How Inequality Kills Innovation

Commentary about business and finance.
Jan. 22 2014 10:57 AM

Can America Afford Innovation?

With wages and incomes stagnant, there’s little room in the marketplace for new products.

Nest Thermostat
The Nest thermostat is great, but who can spare the cash for it?

Product photo via Nest

The majority of commentary on Google’s $3.2 billion acquisition of Nest, the makers of a well-regarded smart thermostat, has been skeptical of the value proposition. Alongside the soaring stock market and a few other recent mega-acquisitions, for many it’s the latest data point in an ongoing story about a bubble mentality in Silicon Valley. But in this case, the skepticism about Nest isn’t skepticism about the business model. Selling manufactured goods through stores and websites works for many firms. Nor is it about the merits of the product. Everyone agrees Nest makes good stuff. It’s about price. Does anyone really want to spend this much to get something better? And that, in turn, is a sad commentary on the state of the American economy.

To many conservatives, recent attention paid to income inequality is at best a distraction from the real challenge of growth and innovation. But in reality these issues are inextricably linked. The development of new and better kinds of products is key to producing long-term economic growth. But determining what kind of products to develop and bring to market hinges crucially on whether or not people will be able to buy them.

Reviewing the Nest Protect smoke detector for Slate, Seth Stevenson had only two criticisms. One is easy to fix—he wanted more options for voices. The other is harder. “It’s $129 for each one,” he wrote, almost a $100 premium over pedestrian detectors.

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The same is true of Nest’s original product, a thermostat. Farhad Manjoo raved about it in his review. But $250 is a lot to pay for a thermostat, when basically every house already has one and new basic ones sell for less than 20 bucks.

At the same time, the sums of money involved here are hardly astronomical. Since the year 2000, inflation-adjusted hourly pay has been just about flat, but productivity has risen 23 percent. If those productivity gains had been more evenly shared, the typical American household’s income could easily be $10,000 higher than it is today. That’d be plenty of money to upgrade the thermostat one year, upgrade the smoke detectors the next year, and still have enough left over to pay off old debts or increase retirement savings. In fact, the roster of innovative, useful, and yet rarely owned household devices is rather long at this point. I don’t have any Nest products, but inspired in part by Rob Mifsud’s article on them, I do now have an immersion circulator and companion vacuum sealer. I enjoy them both, but the reality is they’re hardly everyday necessities and not everyone has a few hundred dollars to spare on extra cooking gadgets.

On a grander scale, if you ask what’s the biggest barrier to efficient hybrid cars or home solar panels, the answer is primarily price, not technology.

Peter Thiel, the libertarian billionaire and proponent of the technology stagnation thesis, is fond of saying that “we were promised flying cars and instead what we got was 140 characters.” It’s a funny observation, but there’s another way of putting it that might be less congenial to his ideological commitments: In a world where all the income gains are accruing to a tiny minority, the only reliable way to build a mass-market product is to make it free. Ad-supported social networks are the perfect innovation for a cash-strapped population. If you have to sell something, then it’d better be in the realm of computer hardware, where component costs are falling so rapidly that this year’s state of the art will be cheap in two years’ time.  

The other option is to make luxury goods. Bloomberg reports that 2014 should be a good year for the yacht industry. Earlier this month, Jaclyn Trop took a great look at the booming market for ultra-luxury six-figure cars.

But the purchasers of this kind of super-premium good are at least as interested in buying exclusivity and branding as they are in buying actual product quality. Consequently, a booming market for luxury goods doesn’t necessarily spur technical innovation in the same way that a booming mass market does. But if even well-received, well-reviewed new products can’t actually move inventory in a world where people can’t afford new stuff, then innovation will be channeled elsewhere, stymied, or hidden.

In his fascinating 2012 book Great Leap Forward, Alexander Field argued that the 1930s were actually a decade of amazing technological progress—the progress simply wasn’t evident to the people living through those years, because it was also the Great Depression and relatively few people were actually in the market for cool new stuff. Adoption rates of technologies ranging from automobiles to electricity stalled out. Things changed after World War II, when firm government commitments to full employment and broadly shared prosperity led to mass adoption of all the new conveniences.

My guess is we’re living through something similar. Innovative product ideas languish in semi-obscurity or simply can’t get financing because in general we don’t have the kind of broadly rising incomes that would support new products. It’d be nice to think that Google’s rather generous offer for Nest represents a bold bet that the situation is about to change. But more likely it’s the reverse. Google is the ideal owner of Nest, because Google has the business model to make Nest work. Get the devices into more homes by subsidizing the cost. Make it up by feeding the data gathered from smart appliances into Google’s all-knowing hive mind and develop even better ad targeting. It’s a bold, aggressive play by a company that’s really perfected the kind of innovation that works in a world of wage stagnation.

But to truly see human ingenuity blossom, we need a mass market for products that don’t necessarily serve a large-scale advertising scheme. For that, we need some pretty substantial political change to reverse the recent pattern of growth that benefits the few much more than the many.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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