Tuesday, 23 June 2015

Trickle Down Economics Versus a Pig

The term "trickle down" economics is now almost a pejorative in itself. The idea that promoting growth and allowing people to be wealthy is a benefit to all is as fashionable as a mullet and a neon Swatch. Guardian economics editor Larry Elliot wrote recently that the theory has been disproven since 2008 by the growing gap between the super rich and the rest, citing Chistine Lagarde, Managing Director of the IMF presenting a report showing rising inequality, and the need to boost the incomes of the poor to achieve overall economic growth.

However the term "trickle down" economics is not a piece of right wing dogma from the 1980s. The term was first used by Democratic Presidential hopeful William Jennings Bryan in his 1896 campaign for the White House. Then as now the term was a straw man. Bryan believed that the state needed to intervene to raise the incomes of the poorest to drive economic growth. The term has occasionally been adopted by those in favour of the free market, but more generally through it's history has been used by those arguing for state intervention.

As so often with the psuedo-science of economics it pays to cut through the worthy sounding reports and peer reviewed numbers games, and to simplify it back to something readily visualised. In this case a pig. If I buy a piglet, feed and raise it to a good size, kill it and sell the meat then wealth has been created. My labour and capital have grown to a value that is greater than the sum of their parts. Yet no wealth has trickled down. I haven't been the fortunate beneficiary of a redistribution. I have used inputs to produce something of value. If someone cures parts of that pig into bacon they have done likewise. If someone cooks that bacon and sells it in sandwiches then they have added to this chain. In no case has wealth trickled down.

This misconception about the nature of wealth seems fundamental to left wing thought. The very notion of trickle down economics rests on the idea that wealth is some sort of endowment, given to the few to be dispersed to the rest. This is a fundamentally interventionist view of the world which will always lead to the demand that the state must intervene to rectify the inequity of the situation. It's an idea that might make some sense in a feudal kingdom where the right to hunt, farm, fish or trade is handed down to the commoners by barons who in turn derive their authority from the king. In a free, property owning society it is a nonsense.

Wealth is not an endowment handed down to the wealthy to be distributed to the population, by trickling down or otherwise. Wealth is what people create by arranging their capital and labour to their own advantage. It doesn't matter if this is done by rearing a pig, 1,000 pigs or by putting together a complex finance deal to fund corporate merger, the principle remains the same.

When people talk scathingly of trickle-down economics being discredited they are attacking a straw man with an attractive yet wholly false metaphor. The idea of wealth trickling down from rich to poor relies entirely on a perception of wealth which is rooted in a feudal society. This was rendered obsolete not by the state redistributing wealth from rich to poor but by property rights giving people the incentive to create wealth themselves.