The Technology Gradient in the Market Economy

Abstract

Technological creation and mass production are usually associated with large-scale production, while technological absorption is found more often in small-scale, competitive firms. Thus, the link between the innovative and absorptive sectors defines a technological and market power gradient that is a key endogeneous feature of the economy. We construct a stylized two sector mass market economy model, one with monopolistic and the other with perfect competition, that innovate and absorb technologies, spanning the technology gradient. Inequality is generated in two ways. Innovation profits are concentrated among a few owners of large-scale innovation, and economy-wide wage levels reflect the lagging average technological level. The model shows there are innovative-distributive policies that can increase efficiency in production, innovation and absorption, and restore income equality by increasing wages and reducing profits. Cointegration and weak exogeneity results based on our study of a panel of US states between 1997 and 2011 corroborate the assertion that the large-scale sector drives aggregate employment, wages and inequality, and that a higher top 1% share results in a steeper technology gradient.