By Ritchie no less. In reponse to this post he tells us that:
Worstall clearly believes in trickle down
I guess he believes in fairies too
They require the same feat of imagination
So, let us ponder, do I believe in trickle down?
It rather depends upon what you mean by trickle down I suppose. So let us take the heart of the argument I presented last time.
If a company makes higher profits (whether by tax dodging or any other non coercive measure) what can it do with the extra money?
1) It can reinvest it in the business, or perhaps start another line of business. More jobs, higher wages, Hurrah!
2) It can pay returns to its investors. This raises the returns to capital in that line of business and will attract more capital into that line of business. More jobs, higher wages, Hurrah!
Yes, this is extremely simplistic but it\’s also true. We know that excess returns attract capital to a sector making such returns (just look at the squillions pumped into hedge funds recently) just as we know that lower than normal returns lead to capital leaving a sector (hedge funds in this past year reversing their former growth).
Or we could look at what happens in a sector in more detail. Take, for example, mobile phones. We know very well that they benefit the poor. Try looking up "cellphone kerala fishermen" for example. We even have evidence that an increase in 10 per hundred of a population having phones adds 0.5% to the growth of GDP (that is assuming that they are in a country which does not have near universal landline service, as poor places tend not to have).
So in the 90s we saw a huge surge in mobile phone in the rich world. Both handset makers and the airtime providers were making money hand over fist. There were, as compared with other businesses, excess returns to capital. So what happened? Other companies started to make handsets, did they not? It wasn\’t just left to Nokia or Motorola, was it? Companies competed forthe right to offer air time. And this didn\’t just happen in thr rich world.
New companies started up in the poor nations as well. They\’d seen that there were those excess profits to be made so why not try to get a piece of that? Similarly, the rich world companies tried to set up in those poor nations extending service yet again. All of this driven by the simple greed for those excess profits.
And the end result is that we\’re seeing per capita ownership rates rise and thus GDP growth above where it would have been without them. There are, as the Kerala fishermen found out, benefits to be had from those capitalist bastards persuing profit:
The short summary — cellphones improve information flow, which makes markets work better and results in quantifiable benefits for all parties. Waste (~6% of the fish were unsold before cell phones) has been eliminated. Fishermen profits are up 8% and consumer prices are down 4%, directly driving a 20 rupee/person/month consumer surplus, the equivalent of a 2% increase in per-capita GDP from this one market alone.
If that\’s what we mean by trickle down then of course I believe in it.
But I rather think that trickle down is the wrong phrase to use here. Trickle up is more appropriate. You only get to satisfy your greed for piling up the millions of pounds if you\’re producing something that the millions are prepared to spend their pennies on.
But then that\’s not what most mean by trickle up economics either sadly.
Or, if you\’d prefer a more researchy answer to the question, try reading this paper:
The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.