The “trickle-down” myth

Joseph Stiglitz says

To be sure, the rescue plan that was just defeated was far better than what the Bush administration originally proposed. But its basic approach remained critically flawed. First, it relied – once again – on trickle-down economics: somehow, throwing enough money at Wall Street would trickle down to Main Street, helping ordinary workers and homeowners. Trickle-down economics almost never works, and it is no more likely to work this time.

Most of his column relates to the bailout and I am not touching the subject again for some time. But there is one phrase I latched on to – “trickle-down economics”. And for once Stiglitz is right, because trickle-down economics is a myth! And this pathetic defense of capitalism has to go.

Money does not flow from the top to the bottom, but it climbs from the bottom to the top. In a September 2001 column, Swaminathan Aiyar explains how this works

I felt instinctively that money could not trickle down in any quantity. Yet I knew it was factually true that the rich and poor were getting richer together, even if not at the same rate. So perhaps modern institutions of the welfare state had made trickle-down a reality.

Today, I know otherwise. It is indeed true that the rich and poor both benefit from growth, but this is not because money trickles down from the rich to the poor. It is because profits trickle up from the non-rich to the rich. That is a very different, and more accurate description of the way a modern economy actually works.

Consider a textile magnate. The theory of trickle-down suggests that the magnate first gets huge profits from textiles, and then a portion of this trickles down to his workers, cotton growers and others. This is simply not true.

The trickle-up theory shows what really happens. First, the cotton farmer grows his crop, pays the agricultural labour involved, and then sells the crop at a profit. Note that the agricultural worker gets his money first, the grower second. Next the cotton moves to a ginning factory to remove the seed. The transporter and ginner make their living in the process. Then the cotton moves to a mill. The staff there are paid their wages and salaries even while processing the cotton, whether or not the mill is profitable. When the cloth is ready, it is sold through agents or traders who also earn commissions or profits. Only at this final point, when the sales are made, does any profit accrue to the textile magnate. At this point, profit trickles up the top.

So, please abandon the theory of trickle down and embrace the theory of trickle-up.

The success of modern economies “is the success of trickle-up”, Aiyar concludes.

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Comments

  • Pramod Biligiri  On October 5, 2008 at 6:13 pm

    It’s sad how many people in India believe in trickle down economics :|

  • Aristotle The Geek  On October 6, 2008 at 2:01 am

    Since I have “been there, done that” as far as religion and ideas on politics and economics are concerned, I can confidently say that its simply a matter of exposure. When people read, learn and really understand what its all about, they will give up everything from religion to socialism. But who’s going to bell the cat?

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