The Myth of the Trickle-Down Effect

A common belief that is prevalent among economists, in particular free-market economists, is that, by itself, capitalism and global free trade will provide a better standard of living for all people in the world because of what they call the trickle-down effect, whereby the wealth that is created by capitalism will trickle down like water to those who are at the bottom of the economic pyramid of prosperity and poverty. Although this simple belief sounds plausible, it is wrong.

When we look around the world today, what do we see? Do we live in a world where those who have a lot of money willingly give their money to the poor or share it with them? The answer clearly is No. Many rich people dislike giving some of their money even to their country’s government, one of whose responsibilities is to help those who are less fortunate, and so they seek all manner of ways to deny the government a share of their earnings, even though the government provides them with many valuable services which enable them to earn as much money as they do and enjoy the high standard of living they enjoy, while providing the social, economic, and international stability without which capitalism cannot function and prosper.

The truth is that, generally speaking, those who have money cling to it as tightly as they can and seek to obtain as much of it as possible, regardless of how much they already have. Most people only give it to others who can satisfy their narrow and frequently artificial desires. Furthermore, many people want to pay as little as possible for the things and services they purchase with their money, so that those who work to produce the things and provide the services they consume are not always paid a decent wage for their work.

With increasing automation, there are fewer and fewer skilled, well-paying jobs in the manufacturing sector in wealthier countries. Consequently, the bulk of the profits earned by highly-automated companies goes, not to the workers, but to their executives and shareholders. Because of price competition, whenever a labour-saving innovation that reduces a company’s costs is adopted by one company, all the other companies in the industry are forced to adopt it, otherwise they will go out of business, or they will be bought by some individual or company that will force them to adopt the new labour-saving innovation in order to reduce costs. The same effect is visible in the recent trend of relocating manufacturing plants in poorer countries where the wages paid to labourers are much lower than in the companies’ home countries: once one company does so, all of its competitors are obliged to do likewise in order to remain in business or maintain its profits.

Rain falls evenly over many parts of the Earth’s surface, but imagine if there were large sheets placed here and there above the land to channel the rain into reservoirs. Those who stand directly under the sheets will receive no rain. And only those who own or control the reservoirs will be able to use the water they contain, which they zealously guard from everyone else, including those who are dying of thirst. We see this scenario wherever a large multinational corporation such as a mining company or agribusiness comes to a country and sets up operations. Because these operations are often highly mechanized, there are few jobs created for the local people, some of whom may have been forced off the land they were living on, or they must live with the pollution and other harmful effects of the company’s operations.

In a capitalist economy, money does not fall like rain from the sky; rather, it is distributed by those who possess it to those who can provide them with something they want, or can help them make even more money. Apart from charity and taxes that pay for government programs, these are the only two ways that those who have money are willing to give it to others. Hence, it is inevitable that this system will produce inequality, since most people’s desires and concerns are limited and selfish. In the extremely unequal system that is laissez-faire capitalism, those who cannot provide something that is wanted by those with money are completely excluded from any share in the wealth produced by the system. It is this simple fact that the advocates of the mythical trickle-down effect fail to acknowledge or understand. We humans now know how to create wealth on a vast scale, but we still don’t know how to distribute it so that those who need it are able to get some of it in order to satisfy their needs and improve their lives.

People’s greed acts like a dam that traps money behind it, releasing some of it only when there is something they want or need. Hence, in a capitalist society, money does not flow freely to all the inhabitants, as the advocates of the trickle-down theory mistakenly believe. Money is prevented from reaching the poorest of the poor because of the dam of selfish greed that traps the flow of money long before it gets to them. In a money economy, it is only those who are employed who can earn money and participate in the economy. The only way the unemployed receive money and other kinds of aid is through charity or government programs.

The false assumption underlying the trickle-down effect is that merely spending money is sufficient to create employment for all those who want and need it. But considering how much of modern industry is robotized and mechanized, this assumption is false. Moreover, it tends to funnel money to the owners of capital and those who are already employed, thus making them even richer. Those who are unemployed or unemployable due to various reasons are left completely outside this system that excludes a great many people – literally hundreds of millions of them – in the world.

Those who have power or control often use their power to get as much money as possible, and this includes employing illegal or corrupt means. We see this situation in poor countries whose governments receive material and financial aid from wealthy countries. Instead of being used, as it was intended, to help the inhabitants, many of whom are destitute, a significant portion of the aid is kept or sold by those in power for their personal benefit. Regardless of how much money one has, most people, including billionaires, seek to gain even more. Clearly this is not rational or even sensible behaviour. Other than the supposedly rational animals that have been mistakenly called homo sapiens, there is no other animal in existence that behaves in this selfishly immoderate manner.

The trickle-down effect is as much a myth as fabulous creatures like the unicorn, Santa Claus, or the tooth fairy. The main difference is that, whereas most adults know that the latter three creatures don’t actually exist, there are many adults who continue to believe in the existence of the trickle-down effect as a solution for the global problem of poverty and inequality. It is important to expose this myth for the falsehood that it is because it is one of the primary reasons advocated for the opening of a poor country’s markets to global competition, which is euphemistically called liberalizing its markets, but which in many cases has had disastrous effects on many sectors of the economy and, furthermore, creates greater and greater dependence on large multinational corporations that care only about making as much profit as possible, and care not at all about the welfare of the many people whose lives they ruin or make worse by their actions.