The Real Failure Of ‘Trickle Down Economics’ (Part I) – OpEd


For decades already, one of the most popular and commonly employed attacks of Keynesians and other left-leaning economists was the one against the idea of “trickle down economics”. They ridiculed the notion that a rising tide lifts all boats or plainly put, the obvious fact that when job creators thrive, so do the people that hold those jobs and sustain themselves and their families thanks to them. 

The main objection to this idea is that such a “trickle down” impact could never actually take place, because of the selfishness and greed of those lucky enough to be at the top. The argument goes: Those privileged few, those “rich and entitled” ones, would never let any advantage “trickle down” – they would surely find a way to cheat and to rip off the people below them so that they would never see any benefit at all, even when the “upper class” was booming. 

It would not be unreasonable to debate this hypothesis, mainly because it “feels” plausible. We all could imagine a world where this could be true, even if, on second thought, it would require humans to be so passionately resentful of other humans to put their demise above their own prosperity. Because the reason that entrepreneurs and private employers of all stripes provide jobs and salaries is not sheer charity, it is need. And when they offer higher wages it is not out of the kindness of their hearts, it is either because they have to attract talent and expertise in order to compete or even to simply survive so they can feed their own families.

And of course, we don’t have to guess whether this is true or not. Historical data clearly prove the aforementioned “capitalist greed” hypothesis wrong. In fact, it has been proven wrong so frequently and so consistently that it barely warrants mentioning. The most recent demonstration was by the hard evidence collected and presented by Johan Norberg in his work “The Capitalist Manifesto”: One of the most conclusive and well-supported findings in the book is that almost 40% of the world’s population was living in extreme poverty at the turn of the century (as measured by the World Bank). But after collectivist and statist ideologies were defeated and abandoned in favour of (at least, somewhat more) market-led political and economic systems, that figure now has fallen to a mere 8,5%. 

Still, regardless of the weight of the evidence against those who posit that prosperity in the private sector is actually harmful to society, the real reason to dismiss their contention is the hypocrisy that lies at the core of it. They argue that no benefit could ever “trickle down” from a flourishing private sector and that no poor person would ever see any improvement in their lives as a result of the “rich” doing better. And yet, at the same time, they advocate for an all-powerful State as the only way to achieve and maintain “fairness” and “equality”. What this essentially means is that advantages and opportunities cannot “trickle down” from private businesses and enterprises, but they can from the public sector (and only from there).

The folly in this line of argumentation is glaringly obvious. As both sectors, public and private, are comprised of humans, with all their faults and imperfections, why should one expect that one group would behave better than the other? Are politicians and public servants somehow “better people” than business owners and their employees? Are traits like greed and selfishness unique to the private sector, while those working for the State have the monopoly on altruism and personal integrity? 

Obviously this is nonsense. The only difference between the two groups lies in their incentives. History has supplied us with more than enough examples proving that, if anything, egregious power abuses are committed by governments much more often than they are by private actors. This kind of monomaniacal obsession over power and control of other people’s lives, the pathological urge to rule and to command one’s fellow humans and to determine what is best for them and the extraordinary arrogance it takes to believe that any of this is realistic, are all afflictions that are almost exclusively found among politicians and state functionaries. Private company owners, for the most part (although there are a few exceptions), are largely driven by the simple desire to be successful, to compete, and to provide for themselves and their families and their employees.

As Friedrich Hayek put it, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order.”

Claudio Grass

Claudio Grass is a Mises Ambassador and an independent precious metals advisor based out of Switzerland. His Austrian approach helps his clients find tailor-made solutions to store their physical precious metals under Swiss and Liechtenstein law. He is the founder of and recognized as an expert on monetary history, economics, and precious metals. A financial and economic speaker and publicist. He writes about global markets, international finance, geopolitics, history and economics. Claudio is a passionate advocate of free-market thinking and libertarian philosophy. Following the teachings of the Austrian School of Economics, he is convinced that sound money and human freedom are inextricably linked to each other.

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