Spillover: When trickle-down meets the dam of unregulated income

     About three years ago, I wrote a blog about the "trickle-down" economic concept (Trickle Down Pyramid blog). In that blog, I talked about the difference between the advertised behavior of how the concept is supposed to behave and how it behaves in reality.

     However, at that time, I did NOT talk very much about how this split between concept and reality occurs. I will try to go into some of the aspects of how lack of regulation and proper progressive redistribution (whether via taxes or other method) makes this inevitable.

     Trickle-down seems to make sense (see the first distribution table from my earlier blog) as a concept. The idea is that you give resources (labor/money/etc.) to a set of people who can, and will, make use of it to increase productivity and the general welfare. In this process, they distribute the resources to a second "tier" of people who do the same thing by passing along to a third tier, and so forth. Thus, the resources are funnelled through the top of the pyramid and "trickle-down" to the rest of the population.

     This theory is not actually unique to capitalism. The same theory holds for many other economic philosophies. The differences lie in how the group is chosen to start the distribution and the rules of distribution. In the case of capitalism, the idea is that the people who have accumulated the most capital are the best at making use of the capital. In unregulated capitalism, these people are allowed to disperse the resources/labor/money as they see fit -- with the underlying expectation that, having previously used capital in such a manner to increase it, they are best qualified to continue to do so. Remember that money is only a symbol of resources -- so by increasing money supply they are, in theory, increasing the amount of resources (food/labor/clothing/health/etc.) I will use the world capital in the rest of this blog as a shorthand term for money/food/resources/clothing/health/etc.

     Looking at the above definition and reasoning, a number of potential problems are apparent. It is also true that, IF the person or group is competent and trying to distribute, and increase, resources that deviation from unregulated capitalism is not needed. Alas, that is very rarely the case (similar to the idea that an intelligent, benevolent, dictator can be the most effective and efficient -- but such people are very scarce and almost never succeed in continuing the system beyond the life of the original).

     The first potentially erroneous assumption is that the people who have accumulated the most capital are the best at making use of the capital. This is true only in the cases where they have demonstrated that they have these skills by starting with very little capital (perhaps only their own labor and ideas) and building it up by the proper use thereof.

     Note that, even in these cases, they are not using ONLY their own capital -- they are making use of lots of public capital (roads, energy supplies, education systems, health systems, safety systems, etc.) However, these people do demonstrate that they can make use of their own capital, in combination with public capital, to increase and accumulate. They do so with an inherited debt to the public for the contributions of the public capital.

     Can those who inherit capital have the skills? Yes -- but it is impossible to demonstrate or be certain of it. At the best, it is a different set of skills to those that are used from building up from initial levels. At the worst, it is a completely parasitic relationship -- where they are taking from the capital base and actually decreasing the distribution and use. It is "unearned" income and, arguably, undeserved. Possessing inherited capital does not indicate any ability to properly use it for the sake of the general population and should be limited as much as is possible within the system.

     The second potentially erroneous assumption is that they will make use of the capital (resources/money/labor/etc.) in a manner such that it will create MORE capital. This is the second aspect of "trickle-down". Capital has to move and be used. As in the previous blog, it cannot be held onto; it cannot be kept without circulation. Furthermore, it must be distributed to others who will ALSO be using it to create more capital. This is what creates the additional "tiers" which allow trickling to take effect.

    In summary, trickle-down runs into three specific problems. These problems are of inappropriate allocation and inheritance, retention, and lack of leveraged distribution.

     We will go into further detail as to how capital is properly distributed in another blog. However, if a group or individual is displaying a "lavish lifestyle" then it is NOT being properly distributed. As described in my blog of three years ago, the retention and personal use of excess income distorts and damages the economy.