“Necessity is the mother of all invention.” so goes the proverb. In a way, this is the opposite of what Austrian economist, Friedrich Von Hayek teaches. Hayek, building on an economic tradition that long left behind the concept of “need” argues that inequality in the economy benefits everyone, because the rich will demand things no one else can afford. As the market meets these demands, they’ll naturally seek greater efficiencies and make those products ever more cheaply until most people can benefit from things we never imagined we needed. It’s a pretty compelling argument and can be seen in everything from computers to billion dollar drugs.
Disruptive economics, on the other hand, works in the exact opposite way. By catering to a segment of the market that has been left behind, it is forced to develop creative solutions that are as cheap as possible and builds on them later to attract consumers with greater income. At first, disruptive economics seems much more egalitarian. Yet these platforms, once they scale with the help of investments by existing finances become sources of inequality themselves.
Is there any way we can get the best of both models of innovation without the inequality?
At the beginning of his masterpiece, Discourses on Livy, Niccolo Machiavelli asks whether it is better to found a city in a place that is rich with resources or has scarce resources. The advantages of a resource rich city are obvious but he contends this leads to social ills. The disadvantage of a city with scarce resources is obvious but he argues it creates sturdier citizens. He concludes the way to get the best of both worlds is through the artificial necessity of law and taxation. How does this apply to modern economic development?
Every day, public benefit nonprofits meet the needs of those who the market have left behind. In so doing, they develop solutions that have the possibility to not only improve the lives of their constituencies but others too. For instance, creative urban farming, artistic and civic education models, co-operative housing, and much more. Where government support allows these projects to scale, it enables these solutions to spread without creating the inequality that for-profit provision does. This is because of the artificial necessity imposed by laws that prevent the distribution of profits.