Based on the Presentation of Philippe Aghion, OECD New Approaches to Economy Challenges (NAEC) seminar, Paris, 11 February, 2016.

Phillipe Aghion, professor at College de France, started his presentation with an almost heresy, as he highlighted that not all inequalities hurt economic growth and the reasons behind high income do matter. One needs bravery for such a statement in a time, when there is hardly any day when the news does not report on the difference of income between the top 1% and the rest of the population.

First of all, Aghion distributes the top 1% into two groups, based on their source of income. In the first case, the high income is coming from lobbying, the use of connections, protected economic sectors, thus it comes from classing rent-seeking behaviour, which in the long term is detrimental to growth in his opinion. In the second case however, the source of high income is innovation, creativity, technological advancement or new discovery, which not only provides extra income for certain people but also beneficial for the economy and society.

An even more important difference according to the analysis of Aghion, which is based on OECD data, that while the rents of the first group, the rent-seekers, are maintained over a long time, the income of the second group based on innovation and technological advancement will become lower in relation to the rest of the society. This is due to the fierce competition in the innovative world, as the main source of extra income, the innovative technology will soon spread in the economy. The IT revolution even makes the entrance of new innovative companies faster.

While Aghion agrees with progressive taxation, according to him decreasing the income of the top 1% should not be a policy priority. Focus rather should be on creating a business environment which supports competition and innovation. The most important policies thus include the improvement of education, the creation of a flexible labour market and the breakdown of competition barriers in product markets

Aghion thus mentions policy challenges and solution that are also in the foreground of OECD work. The main question of this year’s Ministerial Council Meeting – in which Hungary is a vice-chair – is exactly on how to strengthen productivity growth without increasing social inequalities. For this – listening to Aghion – we also have to understand better that why and how the income of the top 1% is increasing.

Phillipe Aghion’s presentation in the OECD

Other presentations of Phillipe Aghion