Innovation and inequality

The other day, I was discussing the relationship between inequality and innovation with a couple of academics. Although our current political leaders seem to believe that the UK’s growing economic inequality incentivises innovation and growth, the academics point out that the research data suggests that inequality actually reduces the level of innovation.

Having spent my life in innovation, this makes sense.

In companies in which there’s a big difference in status between those at the top and the bottom, it’s very difficult for those at the top and bottom to exchange ideas.

Sometimes this is because they literally never meet. In my first job at turbo-generator manufacturer, CA Parsons, the senior managers all lived on a separate floor of the building, ate in a separate restaurant and parked in a separate car park. They even had a separate lift. We never saw them. They never saw us. Neither of us had any idea what the other was thinking about.

These days, it’s recognised that this is inefficient, so for decades there’s been a process of tearing down walls and winkling managers out of their individual offices to commune with the troops. This is often a painful process, and I’m always amused by the excuses managers come up with as to why they need to keep their offices.

Once people are physically sitting in the same areas, using the same coffee machines, car parks and canteens, in theory it ought to be easier for people to share and develop ideas together. However, it’s remarkable how resistant groups can be. At one of my clients there’s an attractive staff restaurant that’s used by all staff from the Director downwards.   But in practice there’s very little mingling: it’s as if most of the tables have invisible labels on that restrict who can sit there. One, near a phone, is even listed in the internal phone book as “cynics’ corner”. Some of us were fantasising about coming in at night to shuffle all the tables around and see what would happen when staff arrived for their morning coffee!

It would probably have ruffled feathers, but shuffling people around is a good way of improving mixing and hence the innovativeness of an organisation. For many years at technology innovators TTP Group, this was almost deliberate policy, so there was a lot of moving of desks. This meant that most people would have at least some new neighbours every 6 months, and would probably find themselves sitting in a different part of the building every few years.

Diversity of experience helps innovation. For example, the first successful domestic bread maker was developed when a Matsushita engineer went to learn from an expert baker about how to make perfect bread. Reading books about it wasn’t sufficient: he had to actually knead dough to get the feel for the twisting, pulling and folding action that would produce the best bread, and then use his engineering skills to develop a simple automated way of doing this.

Inequality reduces innovation, but the converse seems also to be true. The economist and Nobel laureate Edmund Phelps suggests that when societies become less innovative it widens inequality. The suggestion is that this is because innovative firms create wealth for all, just as when Henry Ford invented the mass production of cars, he paid his workers well so they could afford to buy them. In contrast, when firms loose their innovativeness, all that managers can do to improve profitability is to trim costs. And that usually means trimming it from the low paid, not the Board room.

More equal societies may well make it easier to share and combine ideas, but the prospect of becoming extremely rich is very motivating. Without that most entrepreneurs wouldn’t bother to put in the hard work to make their ideas a commercial success.

Cambridge has many success stories to tell, and some successful entrepreneurs have become seriously wealthy as a result. But I find it fascinating how many of Cambridge’s most successful entrepreneurs and innovators are actually very modest about their wealth.   In most cases, you would never realise it from the way they dress and behave (although you can often get a hint from the cars they drive!) Many are Business Angels or mentoring young entrepreneurs to help them get started. Many are active as philanthropists, quietly setting up charities or supporting causes they care about.

In some cases they are even being innovative about how to support other innovators, so over the summer, the exclusive Cambridge Capital Group partnered with the young organisation SyndicateRoom to create an innovative business model for crowd funding start ups.

In Cambridge we probably have the best of all worlds for innovation: relatively low levels of social inequality, relatively high levels of support for innovators, with lots of success stories to encourage people to work hard at it.

Given this culture of innovation, it’s not surprising that (according to data complied by Cambridge was by far the most innovative city in the country, with 1 patent filed per year per 1000 population. Those still smarting about Cambridge’s disappointing performance in the boat race will be pleased to know that Oxford only managed 1/10th of this.