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.

The Magic Penny effect: why greed causes economic disruption

     Malvina Reynolds, an American folk/blues singer-songwriter, wrote (among other things) a song called "The Magic Penny". You can see a full set of the lyrics at The Magic Penny song but the first verse and chorus go:

Love is something if you give it away,
Give it away, give it away.
Love is something if you give it away,
You end up having more.

It's just like a magic penny,
Hold it tight and you won't have any.
Lend it, spend it, and you'll have so many
They'll roll all over the floor.

     As talked about in my earlier blogs on money and economics, money is a symbol of resources. You cannot directly eat money, or grow money, or save money -- money is only a symbol. The symbol can take many forms -- solid ones such as gold or other "precious" or rare metals, electronic ones such as bitcoin, paper ones such as pound notes or Euro notes, or solid symbols of other wealth such as physical coins.

     Initial use of money arose out of the difficulty of having precisely what the other person wanted as barter -- or the difficulty of transporting it, keeping it alive, and transferring it. Even in a regular barter economy, it is difficult to have that cord of firewood in your pocket if you want somebody's fish. Much easier to have some mechanism of recording that the woodcutter owes you a cord of wood at some point in the future. Even easier if there is some common unit such that one cord of wood is equal to five Tunkels and one fish is equal to one Tunkel. Therefore, one cord of wood is equal to five fish.

     The magic penny effect is most directly related to the practice of hoarding. When you hoard something -- whether it is money, or food substances, or newspapers, or whatever -- you take it out of "circulation". It is unavailable to be used. In the case of food, it will eventually go bad and be unusable by anyone. In the case of newspapers, they can rot and the information will become outdated. in the case of money, those symbols of resources disappear from the economy. While they are not actively used, they are the equivalent of not existing.

     As the song goes, you can spend it or lend it and it will be an active resource. Present, and usable, to convert into food, or housing, or video games, or whatever. Within a capitalist society, it can be loaned to those who do not possess adequate symbols of resources at present and a tax (interest) can be charged against what they can contribute in the future. But, if you "hold it tight" it serves no purpose and might as well not exist -- and has the potential of disappearing (stolen, lost in an earthquake, paper equivalents burned, etc.)

     This is related to, but not the same as, the build-up of "phantom resources" or "accumulated capital". Controlled by a central center -- and able to be spent or lent -- but not freely available to those who can most use it (or, potentially, most deserve it. We'll plunge into that topic in a soon-to-come blog. But, for now, keep in mind the "magic penny" effect and see that money is actively used.