THE ECONOMY IS NOT FLAT: THE TECHNOLOGY GRADIENT IN THE MASS MARKET ECONOMY

Abstract

In an industrial market economy, the interaction between monopolistic and competitive sectors results in within-country productivity differences, inequality and inefficiency. We demonstrate this using a two-sector mass market economy model. The monopolistic sector represents large-scale, mass production and is associated with innovation and market power, while the competitive sector represents small-scale production and engages instead in technological absorption. The endogenous dynamics of technological change between the two sectors generate a steady state technology gradient, with the competitive sector lagging behind. This technology gradient is a key endogenous feature of the industrial market economy, associated with economic growth, that generates inequality and inefficiency. Inequality is generated in two ways: innovation profits are concentrated among a few owners of large-scale innovation, while economy-wide wage levels reflect the lagging small-scale technological level. The model shows there are innovative-distributive policies that can increase efficiency in production, innovation, and absorption, and restore income equality, increasing wages and reducing profits. A cointegration and weak exogeneity panel study of the US states between 1997 and 2011 corroborates that the large-scale sector drives aggregate employment, wages and inequality, while top income inequality makes the technology gradient steeper.