Does trickle-down economics work?


Answer by Anirudh Acharya:

tl;dr Yes it does work.

The trickle-down theory deep down is more about recognizing and prioritizing individual liberties over social equality. The phrase might have a wrong connotation to it, but It is not about doling out sops and charity to the rich, and then wait for it to trickle down to the poor.

IMO most of the advances in science and business is due to this phenomenon of 'trickle-down' theory, or as I would like to call it "upholding individual freedom and liberty".

To briefly state the arguments against 'trickle-down' economics – the leftists say that this model is a very elaborate method of alleviating poverty and the poor cannot afford the wait, and we should adopt policies that are more direct and not as convoluted as the 'trickle-down' model.

Before I give an answer I would like to tell a story. The story goes as follows:

About 400 years ago, there lived a count in a small town in Germany. He was one of the benign counts, and he gave a large part of his income to the poor in his town. This was much appreciated, because poverty was abundant during medieval times, and there were epidemics of the plague which ravaged the country frequently. One day, the count met a strange man. He had a workbench and little laboratory in his house, and he labored hard during the daytime so that he could afford a few hours every evening to work in his laboratory. He ground small lenses from pieces of glass; he mounted the lenses in tubes, and he used these gadgets to look at very small objects. The count was particularly fascinated by the tiny creatures that could be observed with the strong magnification, and which he had never seen before. He invited the man to move with his laboratory to the castle, to become a member of the count's household, and to devote henceforth all his time to the development and perfection of his optical gadgets as a special employee of the count.

The townspeople, however, became angry when they realized that the count was wasting his money, as they thought, on a stunt without purpose. "We are suffering from this plague," they said, "while he is paying that man for a useless hobby!" But the count remained firm. "I give you as much as I can afford," he said, "but I will also support this man and his work, because I know that someday something will come out of it!"

Indeed, something very good came out of this work, and also out of similar work done by others at other places: the microscope. It is well known that the microscope has contributed more than any other invention to the progress of medicine, and that the elimination of the plague and many other contagious diseases from most parts of the world is largely a result of studies which the microscope made possible.

The count, by retaining some of his spending money for research and discovery, contributed far more to the relief of human suffering than he could have contributed by giving all he could possibly spare to his plague-ridden community.

The above story is the best example of 'trickle-down' economics at work. When the count decided to exercise his discretion and fund the young man's research( or whims and fancies, as the masses would have called it) the leftists would have cried that the poor and the diseased cannot afford the wait and the count should not make such whimsical expenditures, but rather should care more for the poor, but we all know how the story turned out.

No one had a master plan, which predicted the invention of the microscope and the eventual invention of vaccines. What was done was recognizing the count's individual liberty and his discretion to exercise his choices. That is what trickle-down economics is about.

Milking the rich with taxes does not solve problems, it at best assuages the pain temporarily( Imp Point to note – Taxes are for providing public services and not to redistribute wealth).

**Note – The above story was a reply given by the then-associate director of science at NASA's Marshall Space Flight Center to a letter sent by a Zambia based nun who asked how he could justify funding of space research when children on earth were still dying of hunger.

***
Reply to the horse and sparrow theory –
horse and sparrow theory which ridicules the 'trickle-down' model says that, feed the horse a lot of oats and some of them will pass out and feed the sparrows! Surely it is easier to just feed the oats to the sparrows rather than make them pass through the horse?
I could feed the sparrow if I had an unlimited supply of oats, but we live in a world of limited resources, and I choose to feed the horse because I own this animal and in return for the food I feed I derive some utility from this animal. A sparrow on the other hand is equipped well enough by nature to find its own food and one is not obliged in any manner to feed the sparrow, unless it is owned and caged by him as a pet.

IMHO I find this theory extremely stupid.

Also read Thomas Sowell's The "Trickle Down" Economics Straw Man – Capitalism Magazine.

**PS – This answer is a reply to Makarand Sahasrabuddhe's blog post Trickledown economics on why 'trickle-down' economics does not work and his answer to the question Trickle-down Economics: What are the best arguments against the Trickle Down theory?

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