The theory of economic trickle-down infers that if the rich get better-off, the benefits will trickle down to the poor, and the poor too will get better-off( so everyone benefits).The capitalistic form of economy has its roots in the famous work of Adam Smith, “An Enquiry into the Nature and Cause of Wealth of Nations” (1776). His writings formed the basis of classical economics that laid emphasis on certain fine ideas which were adopted by some of the western countries and finally capitalism took birth. Smith raised his voice against the heavy-handed government regulation of commerce and industry of the time which did not allow the economy to tap its full economic worth and reach the level of wellbeing.
Emphasizing the ‘division of labour’, an environment of ‘laissez- faire’ (non-interference by the government) , Smith suggested that the ‘invisible hand’ of the ‘market forces’ (price mechanism) will bring a state of equilibrium (balance) to the economy and a general well-being to the countrymen. For such an economy to function for public well-being, he has recognized the need for competition in the market. And , modern capitalism, unlike feudalism, works according to guidelines of the economic game which safeguarded private property and income, and in this state of affairs money trickled down from the rich to the poor.
Laissez-faire and capitalism do not mean that individuals aim at the general welfare while pursuing their own welfare. On the contrary, it is the glory of the natural order that while individuals aim at their own private utility, they will also promote interests of all. The essence of the laissez-faire and capitalism is that in its attempt to maximize individual gains it attains general gains. Capitalism permitted people to reap the benefits of their work. When the welfare state became the putative and acknowledged arrangement of governance in the past hundred years or so, workers got several rights and democracy authorized. We witnessed the universalization of education and the prospects to develop human capital and social capital was available to the poor. As a result, the poor had access to financial capital as well. Consequently the economic trickle down worked, it was argued.
But, does money really trickle down from the rich to the poor? Not quite. Little evidence is found for growth trickling-down in India (Basu & Mallick, 2007) and the capital-labour substitution, substituting workers with machinery in an attempt to increase productivity and reduce the unit cost of production, is the main cause for the failure of trickle-down strategy in India. Nonetheless, this does not mean that both the rich and the poor didn’t benefit from growth, but then again it is not the magic of the trickle-down effect. This is actually the Keynesian magic of trickle-up effect or fountain effect which is basically an economic theory given by John Maynard Keynes and used to describe the overall capacity of middle-class people to grow and support the economy. According to this theory, economic growth is enhanced when the government lowers taxes on the middle-class people and increases government spending. The policies that benefit the middle-class in a straight line will increase the efficiency or productivity of society as a whole, and as a consequence, those benefits will trickle-upto the rich (John & Poul, 2003). A business firm makes a profit once it is done with payments to its creditors, workers, managers, and so on Likewise, in the national economy, the success mantra is the trickle-up effect. It may be argued that the trickle-down effect is not a matter of money but about the benefits of rapid economic growth.
Now, the question is whether a government should focus on the attainment of fast economic growth or should it should focus on the quality of growth to ensure that the benefits trickle down to the poor?
This is an inherent assumption that rapid economic growth first of all benefits the rich and then it should also benefit the society at large. But, the million dollar worth question is that how would one generate fast economic growth?
One cannot simply generate fast economic growth overnight and then hope for benefits to be shared. Indeed, fast economic growth is a very hard nut to crack precisely because it takes hard pains to develop the environment in which majority of the people get better off in terms of their productivity or efficiency levels, income, and employment levels. The key issue before the given economy is not that it has to share benefits of growth through doles and subsidies; it is a sharing of benefits by way of sharing the productivity gains. If productivity gains and improvements are all-inclusive and widespread then we can expect huge gains from fast economic growth. Thus, fast economic growth trickle-up via widespread productivity. As far as small economies are concerned trickle-up strategy might not work because a large increase in GNP is achieved with very little participation of people across the economy. And such cases are very rare.
It is very important for the economy to meet the basic needs and provide safety nets to the poor, and providing opportunities for them to become entrepreneurs and innovators. It is high time to make people realize the benefits of high productivity and high innovations. The poor need to have access to basic education and health. If they are risk averse then they dare not to adopt high-productivity strategies that inexorably transmit risks too. Consequently, safety nets are required but not as ways and outlets to distribute benefits; they must be designed to increase the productivity levels in an economy, especially of the poor so that growth trickles up and becomes fast. For achieving such ends, the state has to perform an indispensable role not only as a facilitator but also as a provider of public utilities. In due recognition of this hardcore reality, even after private sector assuming a dominant role in many critical areas, public sector plays and will continue to play a very important role in core areas, particularly social and physical infrastructure.
Degnbol-Martinussen, John; Engberg-Pedersen, Poul (2003). Aid: Understanding International Development Cooperation. Zed Books. ISBN: 978-1-84277-039-9.
Basu, S., & Mallick, S. (2008). When does growth trickle down to the poor? The Indian case. Cambridge Journal of Economics,32(3), 461-477. Retrieved from http://www.jstor.org/stable/23601891.
Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. Raleigh, N.C.: Alex Catalogue.
The author is a Research Scholar at the Department of Economics, Central University of Kashmir and an Academic Counsellor at the IGNOU STUDY CENTRE 1209,S.P. College, Srinagar. She is also Editor in EPH – International Journal of Business and Management Science & Asian Journal of Managerial Science and an IJRULA title awards, 2018 winner (Best Researcher, 2018). She can be reached at: firstname.lastname@example.org