Trickle Down or Trickle Up?

Of all the excuses capitalists conjure to excuse exploitation, trickle down has been one of the most commonly referred to. As capitalism inevitably concentrates the majority of wealth in the hands of a minority, it is difficult to pass neo-liberal policies as developmental. There is little question that capitalist methods are the most effective in increasing economic growth, and are better than perhaps any other model in that regard. However, capitalism as a model for development is simply ridiculous. Neo-liberals calling on trickle down as a model for development serves the same purpose as when imperialists called on social Darwinism to excuse foreign expansion. To enforce a system that is immoral and only serves limited individual interests, it is necessary to find an excuse, or it would never be implemented and respected. Although human greed is often sufficient to make people behave immorally, they are seldom willing to admit to immoral behavior: instead, they prefer to find reasons to justify their behavior. When the US began to look outwards at the turn of the 19th century, wishing to embark on a colonialist journey, they called upon manifest destiny and social Darwinism to defend the evident immorality and hypocrisy of forcing foreign peoples into submission while claiming to uphold values of democracy and self-determination. In the same way, neo-liberals call upon the model of trickle down to excuse their immoral economic policies.

The most significant problem with capitalism is that capitalists purposely focus on purely theoretical and mathematical models. It is important to study economic theories, but it is also important to realize their impact on humans, not their impact solely on soulless consumers, producers, or any other economic agent. I said they purposely focus on purely mathematical models because it is only in this way that they can excuse the exploitation of the masses, that they can assert with confidence that it is beneficial to the majority of the people that a minority gain possession of all the wealth. Because in actual fact if we were to place developmental models on a spectrum ranging from ‘least effective’ to ‘most effective’, the theory of trickle down wouldn’t even be on the spectrum: it would be on a different spectrum, a spectrum of models for exploiting the lower classes (towards the ‘most effective’ end). For those who are not familiar with it, the theory of trickle down is that governments should completely deregulate their economies, because doing so will encourage economic activity and foreign investment, while greatly benefiting entrepreneurs who should be able to acquire large fortunes. All of this newly acquired wealth will eventually ‘trickle down’ to the masses; by creating more jobs and raising living standards. Although it is undoubtedly true that the above occurs to some extent, there are three major fallacies in this model – although saying fallacy is really more of a euphemism for omissions.

The first comes from the fact that one of the main indicators of development is income distribution. One does not require extended data to observe that in underdeveloped countries the income distribution is more skewed than in developed countries – the Gini index is much higher. It is important to note that the Gini index is a ratio: the percentage of a country’s income to different percentages of the population. The higher the index the more unevenly the income is distributed, and it follows that the lower the index the more equally the income is distributed. So a more developed country will have a lower index, and a less developed country will have a higher index. In case you are not familiar with it, this isn’t an opinion. It is a fact that the Gini index is very often included in studies of a country’s development.

Now let us analyze trickle down. The trickle down model states that by drastically raising the incomes of the wealthy, the masses will also benefit with slightly higher incomes. Raising the income of the lower classes, even by tiny amounts, will indeed, ceteris paribus, lower the Gini index. The key word, however, is ceteris paribus: all else must remain the same. And in this case, everything else is not remaining the same at all; the income of the top percentage is also increasing, but the percentage change is much greater. The index will therefore either not change at all, if the proportions remain identical, or, as is more probable, it will increase. So although the income of the poor may have increased (after many years) income is now even more unequally distributed than before. The rich are much richer and the poor are slightly less poor. Does this sound like a noble goal? One that we should pursue to develop underdeveloped, poor countries? To make the poor slightly better off by allowing the rich to accumulate ridiculous amounts of wealth? To demonstrate that trickle down is not advantageous to the poor it should be sufficient to say that capitalism is almost always supported by rich individuals, while the poor masses generally support more socialist policies.

A recurring phenomenon in developing countries that embrace free market ideology is that of capital flight. Because there are no longer any regulations to stem the flow of money, newly acquired wealth almost always leaves the country, to be invested in foreign countries. The rich have no obligation, other than a moral one, to re-invest their money in the developing country in which they made their fortune – what would be required to benefit to some extent the poor, fulfilling the model of trickle down. But how can they be blamed? In a system built on greed, how can they be expected to invest their money in their own countries purely out of moral obligation? It is obvious that they would much rather invest their money abroad, in much more stable and profitable markets.

 The second reason is not as economically testable, but logical reasoning is more than sufficient to support it.  What it comes down to is that wealth is relative – that we humans measure how much we have not as an objective quantity, but in relation to how much everyone else has. A poor man in the US is most likely better off than an average man in Sudan, and yet he is surrounded by incredible amounts of wealth, and therefore most likely feels more deprived than the average man in Sudan. It doesn’t matter what one’s yearly income is, it matters what his yearly income is relative to the rest of the country. I am sure that the wealth and resources the upper class used to have 2,000 years ago were tremendously inferior to those of the lower middle class today. No, and yet one cannot possibly make the case that they were poorer. It is their wealth relative to the rest of the population that makes them rich, not any objective quantity. It is for this reason that equal income distribution is so important: because only by closing the gaps in incomes can countries truly develop. Humans have unlimited wants, and therefore the material wealth of the entire world will continue to increase: thus is proven by history. It is therefore futile to attempt to correct poverty by attempting to raise incomes slightly, especially if the top rises even more. Because poverty cannot be measured by any material quantity, or lack thereof, but by the distance to the wealthiest.

Any objective study of trickle down will reveal that it is not an adequate model for development, but that it is actually a model for concentrating wealth in the hands of the elite. The very name should be indicative of what sort of development it is pursuing: why trickle down? It implies that there is a massive dam of wealth that is for the sole use of the upper classes, and that there is a little crack in the damn that allows a tiny percentage of the wealth to trickle down to the rest of the population. Trickle down may work as a mathematical model, but attempting to implement it in a country that desperately needs to develop is downright immoral. A more appropriate name for a developmental model could be waterfall down; because we shouldn’t be constructing dams so that entrepreneurs have massive gains. If anything, we should be demolishing dams. But a system which distributes wealth to everyone could never be suitable for a capitalist, because after all, under all of the excuses and models, a capitalist’s ultimate goal is to concentrate a country’s wealth in the hands of the elite, isn’t it?

August 28, 2011 / Julian Modiano / Download PDF

2 thoughts on “Trickle Down or Trickle Up?

  1. Pingback: Opinion: Trickle Down or Trickle Up? « The Open Wall

  2. Very impressed with the maturity of thought displayed by the young writer. The second point that you bring up is most important – the relative poverty within an economy. I have seen businesses have an amazing impact on traditionally poor regions. But the wealth distribution still stays blatantly uneven. I wonder though if over and above the Gini index, the percentage of small scale businesses in an economy maybe a good measure of wealth. If the poor can become rich enough to be entrepreneurs themselves, then the trickle down theory would have worked.

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