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Monday, April 2, 2012

Does Welfare Restrain Innovation?


The notion that social welfare stifles innovation seems to be a conservative article of faith. The logic is fairly straightforward, and proceeds from the simple fact that social welfare spending is financed largely by taxes. The amount at which, say, Susan is taxed is inversely proportional to the monetary rewards she should expect from investing her creative energies and, accordingly, her incentive to do so. In short, higher taxes lead to fewer entrepreneurial activities.

While I remain open to this theory, I have seen no evidence to corroborate it. Indeed, annual reports of the Global Innovation Index (GII) have listed European states renown (or, here in the U.S., maligned) for their generous social welfare spending as among the most innovative, and several of them have outranked the U.S. The table below lists the ten most innovative countries, according to the 2011 GII.



Of course, these results do not, in themselves, prove that welfare generosity enhances innovativeness. They do, however, contradict the idea that it necessarily restrains it. Greater equality and innovation do not appear to be mutually exclusive.