Monday, January 27, 2014

Trickle up Vs. Trickle down Capitalism


 
Flemish painter - http://www.museum-brotkultur.de

There was a time when some humans developed the notion that all humans are created equal and that it is unjust for some to amass huge amounts of wealth while others grind their butts out. This notion gave birth to the idea of communism. However, the communists forgot that trees in a nearby forest are not all of equal height, that a certain amount of inequality is natural and trying to enforce an unnatural equality may kill the forest. Sans incentives and the need to strive, many humans would rather sit and grow obese. The result was that entire economies slowed down severely and bread lines became longer and longer until they became longer than the communist manifesto. It was therefore soon discarded into the trash can. Some political parties still call themselves communist but that is simply out of nostalgia. They neither mean it nor live by the philosophy any longer.

Capitalism thus marched across the world gloriously with the fond notion that if some individuals are allowed to grow exceptionally rich, it is good for business and prosperity for all would trickle down, bit by bit, as water does from a leaky jug. This gave birth to the notion of trickle down capitalism.

But, alas, humans, those blinded by greed, can be extremely exploitative given the opportunity. They have now invented a trickle up version of capitalism. In a free for all, some discovered, one can have it all, especially when it was so easy to share the booty with those who make the laws and have them not only turn a blind eye to bonuses and CEO compensations that hit the roof, a limitless profit on medicines the essentials which must be purchased to save lives, arms and guns for fun and profit that go bang bang through children that scream in pain and horror,  the growing lines of homeless and starving, but also have some of those in power actively assist in the game. In this system it is not the case of water leaking down a jug but rather a case of a vampire sucking up the blood of the poor until they are snuffed out on homeless street, before they move on to the next victim, approaching very lovingly on the face of it, as happens in Dracula movies until the teeth are securely latched on. In fact the trickling up has been so severe over the past thirty years or so that now less than hundred individuals in the world own wealth equal to half the humans on the planet according to a report by Oxfam. For more on how the wealth of the world is distributed see this

How does one distinguish a trickle down version of capitalism from the trickle up version? It is not all that difficult really. If the average income and wealth of the few at the top keeps rising while that of others remains stagnant or falls (in real terms adjusted for inflation) then it is the case of a trickle up economy. It happens when the income of those at the top keeps rising while average incomes do not, or in brief if inequalities are rising. They have been doing so ever since around 1980 in USA. (For precise data on this supported by figures and graphs see here)

Trickle up or Trickle down?
How can a trickle up economy come about? It can easily be organized when the taxation system, salary structures, bonuses, corporate profits, national resources and the printing of currency are in the hands of a few. They can create a cosy club to scratch each others back and circles. One can permit unlimited bonuses or salaries so that banks do not have to be robbed with a gun or add hidden taxes such as excise tax on goods that the poor purchase or all one has to do it is print a lot of extra notes and make sure that it is only the rich that are grabbing most of them. The extra currency would no doubt cause inflation but the rich will not mind because they would have ended up with a lot of extra dough whereas some of the poor would be driven out to homeless-street unless they have chosen suicide. A few wily ones would take to theft so that they are caught and then lodged in a free and secure board and lodging facility paid for the rest of their lives at public expense. A Trickle-up happens when  the top executives of corporations and government are allowed to behave like the  greedy brat who eats most of the cake at a tea party (pun intended) leaving little or none for the rest of the family and friends. More details on the inflation phenomenon are in a much older post here,
http://someitemshave.blogspot.in/2012/11/inflation-stealing-from-poor-for-rich.html

How does one know if a government is printing more money than necessary? Well is there inflation of more than one or two percent around in your area? If it is then be sure that is what is happening although the guy controller up there called it something exotic like quantitative easing, something as glorious as happen when persistent constipation is suddenly released in massive quantities :). 

How can you find out if your country is into easing more than other countries of the world? Well! that is easily determined by checking if your currency is devaluing or appreciating with respect to other countries.

How can this trickle up phenomenon be prevented in capitalistic economies? Well there are several methods to do it. Some are,

  1. Pass a bill to tax the rich more at a time when most conservative minions of the wealthy are on a holiday to the Bahamas sponsored by corporation club.
  2. Restrict the top earnings of corporate executives and prevent casinos buffs from managing your bank. A method to do this called the rule of ten, was introduced in this blog a long time ago (search older posts) and the Europeans led by the Swiss have taken a fancy to that notion. or see this older post
  3. Introduce regulation so that governments can confine themselves to constipative easing (when there is deflation for example) but not quantitative easing so that inflation is kept within a band of one percent.
  4. Introduce progressive taxation not just for individuals but also corporations that are raking in huge profits. 
But then the question arises why should they do it , they are having a great time are they not?
For more precise recommendations on how to fix inequalities see this

UPDATE January 29, 2014

Just a few minutes ago I heard Aaron Heslehurst on BBC describing some aspects of the State of the Union address by President Obama. We are friends and follow each other through twitter and emails. The address seemed to echo the sentiment of this post – the trickle up nature of the American Economy, a serious concern although discussed in the lighter vein in the post. This is what President Obama had to say,

“Today, after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged. Inequality has deepened. Upward mobility has stalled. The cold, hard fact is that even in the midst of recovery, too many Americans are working more than ever just to get by; let alone to get ahead. And too many still aren't working at all. So our job is to reverse these trends.”

And
“Today the federal minimum wage is worth about twenty percent less than it was when Ronald Reagan first stood here. And Tom Harkin and George Miller have a bill to fix that by lifting the minimum wage to $10.10. It's easy to remember: 10.10. This will help families.” 

Although the concern of President Obama in these statements is the same as this blogger, this author has reservations. The raising of minimum wages can backfire. It may discourage small businesses from hiring more people and may help to shut down struggling one. The galloping horse of inequality has to be tamed from the head too rather than just the tail. Cap the maximum salaries of executives, raise taxes on the rich and consider a rule similar to the ‘Rule ofTen’ described in this blog.


In conclusion, the world does not need communism but it does need justice and a move away from unfair inequalities, because it is the latter that has led to such extreme responses through human history as communism or severing the head of the queen from her torso when she suggested that  people could eat cake when they ran out of bread.






From the author of A brief Introduction to the Economics of Greed and Exploitation

6 comments:

vinod khurana said...

Dear Ashok ji, A wonderful and very informative article.The trickle down effect, is it working at all. However it is raining more and more upwards.What we need is hammer down and the best way this can come about is through voluntary renunciation.The world needs a Bapu to stir the souls.Is it idealistic or impendig reality.We need to ponder.
With Regards
Vinod

ashok said...

and a stick for those who are not able to check their greed like corporate bosses for whom the sky is the limit for their perks. Greed blinds a person into an infantile state and I know how I have to check my grandson at times from gorging himself on chocolate or something like that.

ashok said...

Thanks for your comments Vinod. few of the other visitors to this blog would realise that you have been one of the senior most financial and tax administrator of India and have a deeper understanding of the issue than most others including myself, who is in reality just a lay person in economics albeit highly educated with the grace of the almighty and post my thoughts from that angle.

The world does need a Bapu (reforming saint) to stir things but I do not know how far voluntary efforts can work with the majority. That would be much to idealistic for the world we live in. What we need is just and fair regulations and systems that also have a fair measure of compassion built into them.

vinod khurana said...

Dear Ashok ji,Thanks a lot.You are my mentor and teacher.Your knowledge on a vast number and varied kind of subjects is really astounding.My view is however very small and limited.Therefore to express myself,I use poetry where one has to write less and mind can wander here and there.You are right. One tends to be idealistic in poems. But then it elevates the mind, atleast temporarily. By the way,I have posted another poem on my blog,and would be grateful for your comments.
With grateful Regards
Vinod

ashok said...

I am flattered :)
Heading to check your poem Vinod.

ashok said...

Vinod please do also check why your blogger profile is not listing your blog? some setting would have to be changed I think.