Supply-side economics, popularly known as ‘trickle-down’ economics, has been the most dominant approach to economic policy in North America (and some other countries) since the 1980s. Despite all economic evidence to the contrary, it is a policy that is still pursued today, to some extent or other, by both conservative and centrist parties in liberal democracies. The primary real-world consequence of these policies is a drastic increase in the economic differences between the rich and poor. The record is not good. Why is the policy so popular?
Please note that I am not an economist. I am not here to debate the merits of supply-side versus demand-side economics but, to the best of my knowledge, the majority of the economists in the world1 dismiss supply-side economics as, essentially, voodoo. There is no evidence that it works. This is essentially what it entails: lower taxes as much as possible and influencing the economy through controlling the money supply but not by taxation; the rich and large corporations will spend and that spending will “trickle down” to everyone else, lifting up the whole economy. The claim is essentially the following: the more money the rich have, the more they will spend that money in the economy they made it in and the more money everyone else in society will have as a result. Such a claim would be absolutely extraordinary were it not so ingrained in the mythology of economics; to the best of my knowledge, no actual proof of trickle-down economics has ever been verified, whereas evidence that it doesn’t work, or that it has all sorts of bad consequences, is legion.2
As I said, I’m not an economist. I’m more interested in why so many people believe in such a bizarre idea. So, why do so many people believe in supply-side? It’s one thing for the rich people to support it, as the rich always benefit from “the trickle-down.” (It’s simple: the rich get to decide what they do with more of their money rather than if income, capital gains and corporate taxes were higher.) But it’s another thing for poor and middle-class people to support these policies and they do, particularly in the United States where supply-side-oriented politicians win regularly at all levels of government.
It’s Just a Matter of the Trickle-Down
The premise of trickle-down economics is that rich people who have more money will always spend more of that money and they will spend it in a way that gives more money to less rich and poor people than any government redistribution program. But this premise assumes many things including:
- rich people who have more money due to lower taxes (or a flat tax) will spend the excess money as opposed to sticking it in a metaphorical shoe box;
- when rich people spend this money, through investment or actual purchases, they will spend the money within the economy they earned the money (an assumption directly contradicted by evidence which shows that, the more money you have, the more likely you are to use off-shore tax havens to not have to pay more taxes);
- when rich people spend this money within the economy, they will spend the money in two such ways:
- they will spend it at stores which are run by and/or employ people less wealthy than them;
- they will invest in ventures by people less wealthy than them;
- the sum total of this expenditure will always do a better job of improving the lives of the poor and middle-class than any government-mandated redistribution of wealth.
The first three assumptions happen a lot, perhaps much of the time, depending upon which country and which period of that country’s history we’re talking about. Rich people do spend money, often in the place in which they became rich and they often spend that money at businesses which then profit more and employ more less well-to-do people. And there are “angel investors” and venture capitalists who specifically fund up-and-coming businesses and people with ideas (provided they can get the attention). But two glaring problems with the first three assumptions are:
- rich people get rich in part because they save more of their money than the average person in their financial situation, which implies that many rich people are less likely to spend as frivolously as the theory wants to assume; and
- middle-class and lower-class families need to spend a certain amount to get by in a given time and place, but rich families in the same time and place need to spend that same amount to get by – they may spend more but there’s no guarantee that they will automatically do so, so the above theory is assuming largess on the part of the rich, which may or may not actually happen. (For example: say a family of four needs to spend $80,000 per year to survive and their two incomes total $100,000 after taxes. They are reinvesting 80% of their money in the economy. Is the rich family of four which earns $1,000,000 investing $800,000 per year back into the economy?)
But most importantly, the assumption that lower taxes to allow for the trickle-down will always be better than redistribution flies in the face of human experience; we are going through a period right now where pro-tickle-down anti-redistribution policies have led to an insanely drastic increase in the gap between rich and poor. Sure, the poorer are absolutely less poor than they used to be, but they’re relatively poorer than the previous generation. The rich get richer at one rate, the poor get less poor at a much, much slower rate, to the point at which they are functionally, relatively worse off (financially speaking only).
It’s one thing for the rich to believe that they should have more money. That’s sensible. The rich want more of there own “hard-earned” money just like all people do. We all want more money and, if election results are to be believed, the vast majority of us only ever want to pay lower taxes (regardless of the potential effects of lowering said taxes). But for those who pay low tax rates, or for those so poorly off that they get their taxes back, to favour trickle-down economics, some psychological trickery must be at work. Some of this is the result of concentrated propaganda, from the American Dream, which tells every poor person that they are just a few steps away from being wealthy, to “welfare mothers” and other myths which propagate the idea that the poor are lazy and conniving.
I think the main reason why those other than the super-rich often favour less tax on the rich is that we all believe the world is fair. A fair world is the only explanation which would lead us all to believe that trickle-down economics can and will work despite the nature of the world and the evidence that shows that less to no regulation is, on the whole, worse for anyone not in a position to exploit that situation.
The Invisible Hand
Adam Smith, the man who first theorized capitalism, used an unfortunate phrase three times in his work on the subject, “an invisible hand.” Here is an excerpt of what he wrote:
The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for.
This is the birth of the trickle-down theory. There are a number of really serious problems with the concept of an invisible hand as it has been appropriated by defenders of supply-side economics:
- It’s ‘an’ invisible hand” not ‘the’ invisible hand. I.e. nobody is really sure if Adam Smith was referring to benefits for the entire economy or only parts of it. But, more importantly:
- Adam Smith was the first person to write about capitalism. As with every other human being to be the first person to study a subject, his study is extremely primitive. We should not look to the pioneer of economics to understand the 21st-century economy. We don’t look to Galileo for astronomy. We don’t look at Galen for medicine. We should not look to Adam Smith for 21st-century economic policy. We have improved our abilities to understand human beings drastically since Smith wrote. Also, we have hundreds of years of more evidence than Smith had. We should look to modern behavioural economics, which incorporates psychology, not classical economics, for solutions to our problems. But, most importantly:
- There is no such thing as an invisible hand. It is a metaphor. It might have seemed an effective metaphor for Adam Smith but centuries of economics as a discipline show that it isn’t really an effective metaphor. Moreover, it is a metaphor that has caused large numbers of people to actually believe in a force in the free market that will make everyone better off. This metaphor has, unfortunately, promoted metaphysics in economics – really, metaphysics as economics – and now we have a bunch of people with degrees who actually believe in a rising tide lifting all boats solely due to the free choices of people. Smith was a Presbyterian and was therefore inclined to believe in an activist God who would sort out everything for God-fearing people. (Smith himself was in favour of market regulation in certain areas, it’s worth noting.) But that is mere superstition. What possible force in the real, extant universe could cause the combined choices of everyone in a society to always be a net positive for everyone? What specific things in human history could possibly lead an observer, such as an alien, to believe that there are uniformly positive consequences when there are no rules for society? (The answer literally is nothing. Take the regular, endless recurrence of the Tragedy of the Commons for just one set of counter-examples: human beings are not good at deciding what to do with resources without structure. The Tragedy of the Commons writ large is climate change.) If the response from an economist is “it just happens like that,” then the burden of proof is on the economist to show through real-world evidence, not theoretical models, that this is indeed something that happens consistently throughout capitalist economies throughout history. To the best of my knowledge that has never been demonstrated.
So, given that we know this economic “theory” is mysticism posing as science, why is it still so popular, not just about the rich but among many regular people?
The Invisible Hand is a Sign of a Just World
Belief in the existence of an Invisible Hand which guides free choices to a net benefit for all is part of a larger belief that the world is fair. It makes sense: you must believe that the world is fair and just to believe that there is some kind of force in the universe – be it god or something less concrete – that lets unconstrained human choices to always total up to a net positive. If there wasn’t such a force, how would it happen? (It wouldn’t. It doesn’t.) The Just World Fallacy, the fallacious belief that the world is fair, is, in many ways, a necessary condition for belief in the Invisible Hand.
It’s a belief that allows the rich, and the politicians they support, to believe that poor people are lazy, rather than unfortunate. It’s a belief that allows the rich to believe they are self-made, even when they most certainly are not. (The most prominent example is Donald Trump, who was born rich but believes and behaves as if he is self-made and his supporters all seem to believe it.) But it is also a belief that allows poor people to believe they could become rich if only they tried harder, or if only they vote for politicians who make things worse for everyone like them. because one day we’ll all be rich if we only motivate ourselves well enough. It is also a belief that allows the poor to believe that, because the rich are all self-made, they too can be self-made billionaires, if only it weren’t for all these pesky regulations protecting all of us.
I’d wager that it is because of the pervasiveness of the just world fallacy in western civilization that these policies get support from those they do not benefit. Because, whether or not trickle-down economics actually works, anti-progressive tax regulations are inherently unfair to those with less money. A flat tax system, where everyone pays the same tax, or a two or three income bracket system, where nearly everyone does, inherently favours the rich and puts the burden of financing civilization disproportionately on the poor and middle-class. (At least until all those poor and middle-class people become middle-class and rich people because of all the money that has trickled down from the rich. Oh wait, you mean that’s not what happens?)
If you believe the world is inherently fair, you believe you are going to get a fair shake. Moreover, you believe that you will get what you deserve. If you work hard, you will be rewarded. If the rules that allowed some billionaire to prosper are the same, or less, for you, then you will certainly also become a billionaire… eventually. That is all the Invisible Hand is; it’s faith in a just world in which human choices are free and rational and positive because they are free and rational. And because human choices are positive, the net result must be positive, by and large, from everyone in the given economy. And so when we let the rich have more of their money by lowering taxes or switching to a flat tax, we are letting the rich make more free, rational choices which can only be a net benefit to the economy. And the benefits just trickle-down to the rest of us, and everyone is better off.
- Not in the United States ↩
- There are, of course, numerous models which support trickle-down economics. But the biggest problem with economics as a discipline is the belief that theoretical models are more important than and prior to reality. These models are based the assumption of human beings as rational utility maximizers, an assumption that has literally zero basis in psychology (and predates the cognitive revolution in psychology, which is not shocking). ↩