In which I am reamed a new one

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.

6 thoughts on “In which I am reamed a new one”

  1. Simply put, trickle down works when government spends money but trickle down fails when the private sector spends the same money.

    Repeat as necessary until you love Big Brother.

  2. Richie believes an economy can rob it’s way to wealth.

    He believes cartels are better for the country than competition.

    I believe he is a faerie at the bottom of the garden.

  3. The reasons for it are probably more complex. I reckon it comes down to the economic interactions between people being renormalisable and efficient markets leading to self-organising criticality. In detail, it’s probably all very messy, but the relevant scaling variables do include something that could be described as trickle-down.

    There is a balance between two effects which can be loosely named ‘investment’ and ‘consumption’. Investment consists of spending money on means to make more money. Consumption is spending money on things you want directly. Investment acts like a coupling constant – causing wealth to cluster. Consumption acts like a temperature – disordering the distribution as money diffuses in every direction. This is ‘trickle-down’.

    The ultimate consumer society is a subsistence agriculture, in which everybody has the same, identical minimum, 100% of production is for consumption, and everybody is dirt poor.

    The ultimate investor society would consist of one person who was infinitely rich. In practice, neither extreme has ever been met, but the consumer society has been approached more closely.

    The balance between investment and consumption determines the wealth allocation according to a power law. The more investment, the richer society is on average, the fewer poor there are, and the greater the inequality.

    The more consumption, the poorer society is on average, the more poor people there are just above subsistence level, and inequality is minimised.

    But you can cut through that and simplify it. Question is, do you believe that wealth allocation in a single efficient market (i.e. with no barriers to trade) tends towards a Pareto distribution?

    Because with a Pareto distribution, lower inequality implies more poor people, and vice versa.

    Or do you believe in zero-sum economics – that there is a roughly fixed amount of wealth in the world that is distributed between rich and poor, so greater inequality implies more poor?

    It’s tricky to find a fair test, because barriers to trade are so pervasive. According to DeSoto [The Mystery of Capital], barriers are particularly common in developing economies; the examples he gives are bureaucracy in setting up legal business and property ownership, and the limited trust possible in the black market. With mutually isolated markets for rich and poor, you get a mixture of two (or more) different Pareto distributions, one based on the minimum for subsistence and the black market, the other on the minimum to afford to comply with the bureaucracy in the legal economy.

    Capitalists believe that the problem is there are barriers to trade stopping everybody getting richer. Socialists believe that the problem is that they are the wrong sort of barriers; that you need barriers to stop the rich getting richer, instead of those stopping the poor getting richer. I’m pretty sure they’re wrong about that. But I think the zero-sum fallacy is so convincing that you’ll never persuade them otherwise.

  4. sugath gampalage

    I am a sri lankan who is a father for four children. i am working in a hotel field. here tourism is not so good.since fifteen years i am trying to devolop my self ,but stil i coudnt. so i am determind to do a small business,thing is i dont have enough money with me. banks are not giving loang because of our salary basis. thats why i decide to write to you.

    thanking you,


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