Fallacies of Capitalism 2: The Trickle down Effect

What is the "trickle-down" fallacy, and how does it relate to the distribution of wealth in a capitalist system?

The "trickle-down" fallacy is the belief that when the wealthy and corporations accumulate more wealth, it will eventually "trickle down" to benefit everyone in society. This theory suggests that if the rich have more money, they will invest, create jobs, and stimulate economic growth, which will ultimately improve the well-being of everyone, including those at the bottom of the income ladder. However, this theory ignores several important aspects of wealth distribution in a capitalist system. Let's understand it with simple examples:

1. Tax cuts for the wealthy: Advocates of the trickle-down theory often argue for tax cuts for the rich, believing that they will use the extra money to invest and create jobs. However, in practice, the wealthy may not necessarily invest their additional wealth in ways that benefit the broader economy. They might opt to invest in offshore accounts, buy luxury goods, or engage in speculative activities like stock trading, which may not lead to significant job creation or widespread economic growth.

2. Wage stagnation: Trickle-down economics assumes that as the wealthy accumulate more wealth, they will increase wages for workers. However, in reality, wages for many workers have stagnated or grown at a slower pace compared to the rising incomes of the wealthy. For example, over the past few decades, productivity has increased significantly, but the gains have primarily gone to executives and shareholders, while workers' wages have not kept pace. This demonstrates that the benefits of wealth accumulation often do not trickle down to workers in the form of higher wages or improved living standards.

3. Rising income inequality: Trickle-down economics fails to address the issue of income inequality. Over the past few decades, the wealth gap has widened, with the top earners capturing a disproportionately large share of economic gains. This suggests that the benefits of economic growth and wealth accumulation are not evenly distributed across society. Instead, they tend to concentrate in the hands of a few, exacerbating income and wealth disparities.

4. Lack of investment in public goods: The trickle-down theory assumes that the wealthy will invest their additional wealth in ways that benefit the broader society. However, in practice, a significant portion of wealth accumulation may not be directed towards public goods, such as education, healthcare, infrastructure, and social programs. Instead, the wealthy may focus on maximising their personal wealth through financial instruments, real estate, or other investments that primarily benefit themselves, further exacerbating societal inequality.

In summary, the "trickle-down" fallacy suggests that the benefits of wealth accumulation by the rich will automatically benefit everyone in a capitalist system. However, this theory ignores the reality that wealth does not necessarily trickle down to the broader population. Instead, it often perpetuates income inequality, fails to address wage stagnation, and may not result in significant investment in public goods. Understanding these limitations is crucial for developing policies that promote a more equitable distribution of wealth and opportunities in society.

The royal family need a new boiler and the right want us to pay for it

Nothing symbolises stagnation, immovable social barriers and hierarchy quite like the royal family. No wonder George Osborne is leaping to their defence

• 
• • Suzanne Moore
  • The Guardian, Wednesday 29 January 2014 20.01 GMT

The royal family gathered on the balcony at Buckingham Palace. The public accounts committee has questioned how well the royal finances are administered. Photograph: Leon Neal/AFP/Getty Images

When you are on a limited income, a boiler packing up, a leaky roof, dodgy guttering or a basement full of asbestos can tip you over the edge. If you are mortgaged-up, you cannot let your property fall into disrepair. If you live in social housing or are renting privately, you may find you receive little help; landlords and councils will keep you waiting and do the bare minimum. Rising food and fuel bills mean that, despite our much-trumpeted growth, too many are left with the "heat or eat" dilemma.

So can you imagine what it is like to be the poor old Queen? The boiler in Buckingham Palace is 60 years old. And you will get no Camilla cracks from me: I've moved on.

What, though, is the Queen to do? Obviously the answer is not pay for it herself out of her own enormous fortune because … well, she is the Queen. We – her largely indifferent subjects – should be ecstatically happy to pay for her repairs. Instead, though, "we" – in the shape of the public accounts committee headed by Margaret Hodge – are nosing round asking awkward questions about the royal finances, which is really rather vulgar. It is "bizarre", Jacob Rees-Mogg has told us, that this committee should query the pittance of royal expenditure when we should be looking at cutting other public spending.

It's not that bizarre, as every public body has had to trim itself down, or at least not flash the cash around quite so obviously, in the middle of a recession. The royals, though, have maintained staffing levels and those staff have carried on spending, cutting only 5% over the last six years. Last year, the monarch received a sovereign grant of £31m and the family can raise money when they choose to. They only open up Buckingham Place for tourists two months of the year, even though they were advised years ago to keep it open longer. Nonetheless, via entry fees and renting it out to JP Morgan, they made £11.6m last year.

Still, everyone loves our dutiful Queen and republicanism remains at a low ebb. But I wonder, as she hands over more duties to Prince Charles, and Kate and sprog will have to be wheeled out more, whether this spectacle will continue to persuade us on the "value for money" front. Which is surely why that expert in fairness and accountability George Osborne has intervened. Why should the royals have to dip into their million-pound emergency fund to repair their own palaces? Gideon feels the committee "is being unfair to the way the royal household has managed its finances".

The inimitable Nadine Dorries has also been on the case. She feels embarrassed "listening to Margaret Hodge reel off the list of repairs that need doing to royal buildings". Nadine embarrassed? This is serious. She then surpassed herself by saying: "What the royal family does for us is beyond explanation."

Indeed. Why is the Treasury stepping in here, except to defend, as ever, the super rich? While the number of the undeserving poor grow – scroungers, shirkers, people who steal food that has been thrown away out of skips – it is no coincidence that the number of deserving rich expands.

This is Conservative ideology at full throttle. We cannot increase tax on those with big incomes because they are the motors of growth and may leave. We are simply to accept that such concentrated wealth is a global trend. To say otherwise is some kind of anti-business communism. The anger towards bankers as the undeserving rich has dissipated as we are fed constant tales of vital entrepreneurs. Those at the top should not have to open their books, as they themselves are an actual asset. The vastly wealthy are now called "wealth creators".

The monarchy is part of this charade and we are to be grateful as we pay £1m to do up the house of the Duke and Duchess of Cambridge. Or rehouse Princess Beatrice. We provide the help to buy. We pay for their DIY, but they need more.

At the very least, one would have thought that the palace and its Tory courtiers would want to appear more frugal. Instead, the royal energy bill is that of the average British household. Multiplied 2,280 times. This kind of spending, and the apologists for it, fail to acknowledge a world of foodbanks and steep decline in social mobility. For if anything symbolises stagnation, immovable social barriers and hierarchy, it is the royal family. They embody the exact opposite of hard work, aspiration and innovation and all the guff that we are told will make things fairer.

Of course the chancellor defends those born with enormous financial assets. This government, after all, bought the American model that extreme and visible inequality is a price worth paying for the dream of social mobility.

The reality is different. We actually subsidise those born to rule at a time of gross inequality and zilch mobility. These people have no shame. They believe themselves to be the deserving rich. So put your hands in your pockets to mend the ancient boilers of billionaires. And feel thankful. Yes, this really is "beyond explanation".

Happiness: the silver lining of economic stagnation?

A study suggests that national wellbeing peaks at £22k average income. But that doesn't mean there's no point in pushing for wealth

• 
• • Julian Baggini
  • theguardian.com, Thursday 28 November 2013 16.56 GMT

More money, more problems? Photograph: Roger Tooth for the Guardian

It's time to rewrite the story of the financial crisis. Far from being a disaster movie, it was in fact a tale of salvation. As for the green shoots of recovery we are now seeing, they are virulent weeds to be stamped out.

That would seem to be the conclusion to draw from a new study that suggests ever-rising national wealth is the source of decreased life satisfaction. Looking at data from around the world, Warwick University's Eugenio Proto and Aldo Rustichini of University of Minnesota conclude that average wellbeing rises with average income only up to around £22k per head per annum. After that, it slips back again. Britain is more or less at that sweet spot, which suggests economic stagnation may be an excellent way of avoiding the problems of poverty without acquiring the problems of wealth.

You may well be sceptical. Even the authors acknowledge that many people "still prefer to live in richer countries, even if this would result in a decreased level of life satisfaction". In other words, people are overall more satisfied by less life satisfaction, which suggests we should take the whole concept of "life satisfaction" with a pinch of salt.

Any attempt to measure wellbeing in a robust way is fraught with problems. One of the most obvious is that people naturally rank their contentment relative to what appears to be a reasonable expectation, and that varies with time and place. That's why, when offered to rank their life satisfaction a scale of one to 10, most choose around seven or eight, irrespective of era or nation.

Even setting aside these doubts, there are more important reasons to be cautious about how we interpret the data. What it does appear to show, and which almost all studies support, is that having a low income is more of a problem that having a high one is a benefit. From a public policy point of view, that suggests the priority should continue to be raising the life chances of the worst off, not those of the better off, or even the "squeezed middle".

If we achieved that, is it really the case that there would be no point in then increasing wealth even more? Not so fast. We have to ask what explains the levelling-off in perceived quality of life. Proto and Rustichini suggest that the key is "higher GDP leads to higher aspirations … driven by the existence of more opportunities or by comparison with the Joneses". But this "sets up a race between aspiration and realisation; when realisation is lower than aspiration, the psychological cost paid is disappointment". Worse, this creates a feedback loop, as the let-down further widens the aspiration-realisation gap.

What should be clear is that this is not an inevitable consequence of greater wealth. Some individuals learn to treat their material comfort as a blessing and are not concerned by the prospect that they could have yet more, or that others already do. The materialist treadmill is not one we are obliged to get on once we reach a certain level of income.

In short, the problem is explained by the familiar idea that money is not valuable in itself, but only for what it can do. The failure of western societies to convert greater wealth into greater wellbeing is in essence a failure to use our wealth wisely. This should not surprise us. The majority of people alive today and throughout history have not been accustomed to plenty. Humanity is on a steep learning curve and many of the lessons we need to learn go against our natural tendency to acquire first and ask questions later.

That's why the debate about the relative merits of increased GDP and "gross domestic happiness" are misguided. They are not mutually exclusive options. The optimal strategy would be one in which we grew wealth but harnessed it better to enable people to really flourish, rather than just have more stuff. What we should be afraid of is the pointless march of a narrow materialism, not the resumption of economic growth in itself. A richer world in which the money was well spent is something with which we should all be well satisfied.