Have you heard about it? Trickle-down economics has failed. Barack Obama says so. Paul Krugman says so. The Wall Street Journal says so. The Guardian says so. You’ll hear it in sociology campuses across the Western world, albeit phrased in a more complicated way. And if that isn’t enough, type ‘trickle-down economics’ into Google and Google will automatically suggest the additions ‘doesn’t work’, ‘myth’, ‘debunked’ and ‘failure’. So it must be right, mustn’t it?
But what exactly is trickle-down economics? According to its critics, it is the idea that making the rich richer is good economic policy. Why? Because as the rich buy goods and services, save, invest, and perhaps make philanthropic donations, their wealth will radiate off to the rest of society.
Over the last ten years, I have met all sorts of economists believing all sorts of weird things, but I have yet to meet a trickle-down economist. Where are these people, about whom so much is written, and whom so many are busy debunking? Could it be that they are a fantasy product, made up by people who combine an intuitive disgust for free-market ideas with an unwillingness to understand them?
Whatever trickle-down economics is, it has nothing whatsoever to do with free-market economics. According to the way his critics describe him, the hypothetical trickle-down economist seems completely indifferent to how the rich have made their riches. If an actual trickle-down economist could be conjured up, he would presumably defend the fortunes of Sicily’s mafia, Colombia’s drug barons, and Putin’s oligarchs. Their wealth trickles down, he might argue, as they hire people to polish their Ferraris and fish the leaves out of their swimming pools.
Let’s contrast this to three people who have amassed great fortunes by means of market exchanges: Ingvar Kamprad (IKEA), Karl Albrecht (Aldi), and Michael O’Leary (Ryanair). What these three have in common is that they found ways of stripping a product to its bare bones, and then cut the cost of providing it to a fraction of what it previously was. And while it was not their intention, they have also spurred competitors to cut their costs to comparable levels. As a result, low-income earners in contemporary Europe find groceries, functional furniture and the occasional flight more affordable than middle-income earners a generation ago.
It would be absurd to argue that nobody has benefited from these three gentlemen’s economic activities except themselves. But it would be even more absurd to claim that their wealth had somehow trickled down to the poor, because it was exactly the other way round: our three entrepreneurs have found ways of making life easier for the least-well-off, which is why millions chose to buy from them. Only then, and then only gradually, did wealth ‘trickle up’ to them.
Free-market economists defend the right to get obscenely rich by making the poor better off. They couldn’t care less about how rich the rich are, but they care a lot about how they got rich in the first place. Our problem is not that we have too many innovative, cost-slashing entrepreneurs. Our problem is that we have too many people who get rich not by means of market exchange, but through the zero-sum game of the political process: the landlord who can get away with excessive rents, because the planning system keeps competitors out; the renewable energy producer from whom no sane electricity supplier would buy anything, if the government did not force them to do so; the farmer, who gets most of his income through subsidies; the sock puppet CEO, who, unable to find voluntary donors, has his generous salary effectively paid by the EU and the Department of Health.
These are the undeserving rich - no matter how much of their wealth may trickle down.