Ever since Adam Smith published what is essentially THE seminal theoretical book on economics, "An Inquiry into the Nature and Causes
of The Wealth of Nations", (hereafter just The Wealth
of Nations) economists, styling themselves as "scientists" in
many instances, have been wrestling with basic questions which have evolved in the modern era from Smith's theories,
which, while relatively straightforward with
regards to nation states and/or empires, simply fail to deal with concepts Smith
could not have even projected with a real crystal ball. Smith's magnum opus was published in Scotland
in 1776, contemporaneously with the Declaration of Independence, which , of
course precursed the War for American Independence fought, oddly enough, less
about The Rights of Man and more about
taxes and tariffs, especially the last. Yeah, I know, "But Mike, what about "When in the course, of human events.....etc...?" Remember, this was written to convince ordinary American colonists to fight the British. It would have sounded a bit crass if it started "Since we are tired of Tariffs and want to make more money.......!"
A central theme, oft repeated in various iterations in the book is as follows,
(edited by me for clarity, not inference): "As every individual, therefore, endeavours as much as he can both
to employ his capital in the support of domestic industry, and so to direct
that industry that its produce may be of the greatest value; every individual
necessarily labours to render the annual revenue of the society as great as he
can. He generally, indeed, neither intends to promote the public interest, nor
knows how much he is promoting it. By preferring the support of domestic to
that of foreign industry, he intends only his own security; ........he intends
only his own gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his intention. Nor is
it always the worse for the society that it was no part of it. By pursuing his
own interest he frequently promotes that of the society more effectually than
when he really intends to promote it.
Smith's clear
belief, stated here, was that prospering commercial enterprises help the body of
mankind even if doing so was not the entrepreneur's objective or concern. It
has been lost to some in the here and now, that this concept was iterated in a
far different time and economic place and with markedly differing variables.
Smith's
statement about the benefits of "an invisible hand" shows Smith's
belief that when an individual pursues his self-interest "under
conditions of justice", a
concept honored more in the breach than in the marketplace these days, he unintentionally promotes the good of
society. Smith asserts that "Self-interested" competition in
the free market, tends to benefit
society as a whole by keeping prices low, which in turn may be seen to still build incentive for a wide variety of goods and
services. What is overlooked
by many modern theorists is that Smith's actual focus was first, on individual
commodities, and secondarily on the concept that an entrepreneur, having
succeeded would be motivated to put
those profits to work, building trade/business and providing income for those
he employed (a number which would, of course, increase as he put more of his countrymen to work.
Nevertheless, Smith,
even in 1776, was a shrewd judge of human nature and was therefore was wary of businessmen and warned of their "conspiracy
against the public or in some other contrivance to raise prices". Numerous
times, both in "Wealth...", and in essays, Smith warned of the inherently
collusive nature of business interests, which may form cabals (OPEC?) or
monopolies, fixing the highest price "which can be squeezed out of the
buyers". Smith also warned, almost
as if he had a lens into the present day, that a business-dominated political
system would facilitate collusion of
businesses and industry against consumers (the rest of us poor shlubs), scheming
to influence politics and legislation.
Smith categorically states that "The interest of
manufacturers and merchants "...in .... trade or manufactures, is always
in some respects different from, and even opposite to, that of the public..."
Smith then concludes that regulation of business should be carefully and
suspiciously regarded, even after warning that business seeks its only own
good, and that societal benefits are simply an example of the "law of
unintended consequences", a concept unconsidered by anyone in 1776 and unvoiced
until 200 years later.
Critics of
Smith might point out that, as we all noted in High School economics, that there
are huge and increasingly widening gaps of difference between micro and macro-economic
concepts. Micro, which Smith would have instantly grasped, although the baby
sitter concept might have puzzled him, is frequently taught using the concept
of the baby sitter market in a neighborhood, as in "if there are more kids
needing "sat" and fewer sitters to "sit" them, the "sitters"
will command a higher hourly rate due to a "sitter shortage".
Conversely, a surplus of sitters or shortage of "sittees" will drive
price down, as sitters are willing to work for less.
The problem
with this admittedly simplistic example isn't simply a matter of scale, but a
lack of inclusion of all the factors which might come into play. For 49 years after Smith
published, any attempt by labor to control the supply of workers, thereby
shifting the equation in favor of higher wages (Unions), was a criminal act. In
fact, until 1871, another 50 years or so later, it was still a criminal offense
to apply Smith's theory to the labor side of the supply/demand equation. Seems
unfair, huh?
On the other
side of the equation, Smith apparently believed several things which while
theoretically valid, have changed markedly where the "rubber meets the
road." Start with the assumption
that a business man, prospering, will invest those profits back into the
concern, employing more or paying better wages (that whole 'good of society'
thingy). In the modern, both concepts are flawed, as profits get warehoused overseas and jobs follow them. Additionally, Smith lived in a world where
imports (and some exports) were taxed and said taxes/tariffs used to run government, although in candor,
there was already massive corruption, as some merchants were favored by
government, the higher up the food chain of nobility, the higher the favor and
perks. Smith essentially didn't, and couldn't have, foresee(n) the increased
acceptance of commercial success of non-peers as a stepping stone up the social ladder,
gradually doing in Britain what the likes of New England
merchants such as John Hancock, the Morris's (Banking), the Lees (Va planters),
the Livingstons and Schuylers of New
York were already doing in America.
Now to the crux
of the essay. How does this apply today to our world and financial structures? Start with the fact that we are
constantly bombarded with the refrain of "Tax reform" from the
political right. In their context, this really is code for "lower taxes on
the wealthy." The promise/premise of these folks is the idea that lowering
taxes on the 1% or top of the economic food chain will, as Adam Smith predicted
in his different time and place world view, result in increased re-investment
of the resultant higher profits, business growth, more jobs, higher wages and
possibly, a cure for athlete's foot. If only!
Over time, they
have developed a name for this theoretical and illusory occurrence. It is even taught in
schools, even in college level Economics courses. You know it as "The
Trickle Down" theory. Briefly, it implies and asserts, every time tax
reform is mentioned, that all that Smith theorized will occur, and we will all
benefit. This has been said so often, by so many Conservative pundits that, in
the minds of many, including those who should know from its disproval in their own economic realities,
it actually works, and somehow they just missed the benefits bus.
In truth, and,
as proved over and over and over and over again in the 20th and early 21st
centuries, wealth does not trickle down from the rich to the poor. Period. No, that's not Senator Elizabeth Warren talking.
That's the latest conclusion of new research from the International Monetary
Fund. Researchers found that in actuality when the top earners in society make
more money, it actually slows down economic growth. On the other hand, when
poorer people earn more, society as a whole benefits. But how can that be, Adam
Smith said.....?!
In sharp contrast to
claims of the "trickle downers", when the lowest 20% of earners see
their income grow by one percentage point, the rate of growth increases by
nearly 0.4% over the same period. That's actual GDP growth, vice decrease, for the
math challenged. This new report characterizes widening income inequality as "the
defining challenge of our time," which to no great surprise is how comments from President Obama described the
situation some years ago.
So why is this,
could Adam Smith have erred? Researchers concluded that high levels of income inequality drag
down growth because poor people struggle to pay for health care and education,
which hurts society as a whole. These factors wee, to Smith in 1776, simply irrelevancies. In their words, "For instance, it can lead
to under-investment in education as poor children end up in lower-quality
schools and are less able to go on to college," "As a result, labor
productivity could be lower than it would have been in a more equitable
world." The report builds upon research from other international
organizations and Joseph Stiglitz, the Nobel laureate who has been campaigning
against rising inequality.
A second
question might be to ask, "well ok, has trickle - down economics ever
worked? A 2012 study cast indicates that
wealth of the super-rich does not trickle down to improve the economy, and has yet to do so, but
tends to be amassed and sheltered in tax havens with a negative effect on the
tax bases of the home economy. This of course, voids Smith's theory since he
knew not of "off shore accounts"
Still think your far right buddies have it right? Won't
listen to me? Ok, how about Warren Buffet?
To paraphrase a popular insurance company's adverts, "He knows a
thing or two because he's done a thing or two!"
In a recent article entitled, appropriately enough
"Warren Buffet, and The Fallacy of
Trickle-Down Economics" Buffet asserts, "The belief that trickle-down
economics will make us all prosperous is fallacious. Tax increases on wealthy people do not hinder
job creation. Lower tax rates on the wealthy and lower job creation has been
the experience of the last ten years"
Per Buffet, (I'm
paraphrasing and compacting for clarity): The current sluggish economic
recovery is a result and an index of the
fallacy of “trickle-down economics.” Trickle down is also a favorite shibboleth
of Reaganomics "supply- siders." It’s a term favored by supply-side
economic theorists, who have appropriated it as if they invented it (they
didn't). Supply side "theory" (calling this failed ideology a theory
casts doubt on the legitimate application of the word "theory") posits that by
increases in the wealth of America’s entrepreneurs through tax breaks, economic befits will
“trickle-down” to the lower economic echelons of society and bring them
prosperity as well. The theory is all about incentivizing wealthy people with
more money to innovate and invest into their enterprises. By doing so, the
theory puts forth that they will hire more people. The truth is that the rich are
the only ones who benefit at the expense of others. An Australian government
official recently referred to trickle down as "the rich pissing on the
poor"
The theory is
at the heart of America’s problem in reaching bipartisan agreement on a
balanced approach of spending cuts and increasing revenues in the reduction of
debt and deficit.
Libertarians such as Ron Paul, the Tea Party folks until recently
led by Bachmann, Cruz, Jindal et al, ad
nauseum, and Republicans led by House Speaker Ryan (and Boehner before him) and Senate Majority Leader Mitch McConnell all
embrace this theory. They will support
cuts in spending that will negatively impact the struggling poor and middle-class, while
allowing the rich to remain off-the-hook.
The numbers, historically
and recently as shown in the accompanying graphs show up trickle down as failed theory, and even worse, as failed
policy. The sad part is that some on the Far Right are actually convincing
their supporters, many of whom suffer economically, that they and only they can
"fix" the system with , wait for it.......... tax reform, in the form of (more) tax cuts for the wealthy and a panoply
of tax increases and benefits for those
least able to afford them. But "Trust us, this time trickle will work", even
though it filed Reagan and Bush 43.
One popular definition of insanity is "doing exactly
the same thing over and over and expecting a different result" It's a bit reminiscent of the computer user
pressing the power button over and over, wondering why it won't work and
finally calling tech support oblivious
to the fact that the power cord isn't
plugged in. The Far Righters have done a great job of convincing people that
they should vote their way because of trigger word
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