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Why Supply Side/Trickle Down Economics Can’t Succeed

December 27, 2012

By definition, trickle-down/supply-side economics depends on the wealthiest individuals in the economy to spend very substantial amounts of their wealth, and to sustain that spending at all times. There are two reasons that this scenario will never occur in any modern, real-world economic environment.

Reason #1: Logistics. For one thing, spending substantial amounts of money takes a substantial amount of time. Once you own a large chunk of wealth in the economy, most of that wealth is not going to be liquid. There’s also the issue of supply and demand: Creating more wealth takes a large investment to begin with, but if the only people who can sustain the supply side make up only 1% of the population, there is simply not that much liquid, disposable wealth to spread among them.

Reason #2: Philosophy. This has nothing to do with selfishness, and everything to do with money management. Yes, if you have 8 or 9 figures to invest, you CAN put it into new companies and new industries to create new jobs and spur innovation. But is that the most attractive way to invest that money? Probably not. There are thousands of financial instruments you can buy that will likely give you higher returns much more quickly, and definitely with a lot less effort and oversight on your part. Of course, if you go that route, you are simply accumulating wealth rather than creating new wealth to add to the economy. Accumulating wealth and creating it are not the same thing.

Any economy that doesn’t compel the creation of wealth is doomed to fail. So is any economic theory that doesn’t provide any compelling reason to create wealth. Supply side economics is one of those theories.

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17 Comments
  1. Quantum Windbag permalink

    Logistics and wealth creation have nothing to do with each other. Logistics is about controlling the flow of resources, wealth can be created with nothing more than mental effort, bypassing logistical logjams entirely.

  2. @QW: You’re referring to logistics in the literal sense. It’s also common to use the word to describe the planning and execution in any complex operation (as I did).
    In addition, wealth creation requires innovation, and although it’s theoretically possible to innovate with only mental effort, in almost all cases the innovator needs to use capital and/or other resources to produce and market the results.

  3. Quantum Windbag permalink

    Bill Gates created massive amounts of wealth, want to tell me how much planning he put into that task? How much capital did he have to invest before he built Microsoft into the world’s most powerful bit of intellectual property?

  4. At the VERY LEAST, Microsoft had to pay its employees (from 3 in the first year, to 7, to 9, etc.) While I’m not privy to their expenses in the 1970s, it’s safe to say that the $16K the company made in 1975 probably didn’t cover every last expense. I suppose Gates could have borrowed from his dad from time to time, Bill Jr. was wealthy in his own right. Point is, even Microsoft took 4 years to earn its first million.

  5. Quantum Windbag permalink

    There were three owners/employees in 1975. Their expenses amounted to 24 hours worth of food and drink used during the marathon coding session to develop the BASIC compiler for the Altair and the purchase price of the kit computer.

    Seriously dude, …

  6. What makes you think they didn’t pay their employees that year?

  7. Quantum Windbag permalink

    The employees were the owners, what makes you think they didn’t?

  8. My guess would be that the corporation did indeed pay its owner/employees that year. This was part of my point. The rest of my point is: it’s unlikely that the corporate entity of Microsoft, Inc. stayed in the black every single month through the first several years of its existence based on its revenue alone.
    Look, I agree with you 1000% that innovation creates wealth, and that the act of innovation doesn’t require capital. Plenty of innovators have made a decent chunk of change without spending a thing. Unfortunately, there is a significant limit on how much wealth a given innovation can create without any outside help whatsoever. Beyond that limit, the innovators have to employ the tools of modern capitalism, such as loans and outside investors. Nobody in modern history has created “massive” amounts of wealth in any other way.

  9. Quantum Windbag permalink

    Your are supposed to be arguing that logistics somehow prevents supply side economics from creating wealth, you have done no such thing. In fact, you just argued that the tools of supply side economics actually enable wealth creation.

  10. No need to be rude, sir. Arguments are much stronger when they’re presented politely.

    In fact, this discussion has everything to do with logistics. They are unavoidable the minute any company applies for a loan or offers equity to investors, along with whenever the company hires more than one person. Nobody is going to fund or lend to a company that does not have a strong, detailed business plan, which itself represents a considerable amount of logistics. I’m sure that everyone who has written such a plan would agree. And the more resources that any business has to expend on logistics, the fewer resources it is able to spend back into the economy. To my knowledge, no supply-side economist has ever taken this fact into account.

    At any rate, your point that supply-side economics still enables wealth creation from innovation alone deserves closer examination. As far as I know, the only way to profit from an innovation without any investment is by selling the innovation, or the rights to it. When that happens, it does create wealth without investment, but let’s see if we can come up with at least a vague estimate of how much wealth gets created this way.

    Let’s suppose that each year throughout the US, 3,000 inventors come up with an idea that’s economically viable and decide to sell that idea. (This is only a rough guess, so please let me know if you have better data.) Let’s further estimate that each inventor sells the idea for an average of $200,000. Three or four of them might get a million or two, and most won’t even get $10,000. The total works out to $600 million in new wealth being generated per year. Not at all bad, except that, in a multi-trillion dollar economy, it doesn’t even come close to being counted as peanuts.

    So, strictly speaking, supply-side economics works on a small scale, and up to a point, but not well ENOUGH to matter to a nation’s economy.

  11. Quantum Windbag permalink

    I don’t recall arguing that innovation is the only source of wealth creation, can you point out where I said that? What I am arguing is that logistics and wealth creation are not interdependent or related. Logistics problems slow down the transfer of wealth, which explains much of the current wealth inequality in the US, but it does not hamper its creation at all.

  12. Having already established that most wealth creation requires investment and/or leverage (both of which are slowed down by logistics), what other capital-free methods of net wealth creation are there, apart from innovation?
    Why don’t you list some of these methods, so that we can figure out approximately how much wealth they create, as in the previous example?

  13. Quantum Windbag permalink

    Interesting that you edited my reply, is there a reason for that?

    By the way, there are numerous studies that show the benefit of supply side economics and lower marginal tax rates on productivity and the economy. We can clearly demonstrate the benefits of supply side versus demand side economic theory by comparing the US and France. The man who won the Nobel Prize for economics in 2004 did a study that clearly proved that demand side economics decreases productivity and has a negative impact on the economy, which was almost exactly the opposite of what he expected to find.

    http://www.econlib.org/library/Enc/SupplySideEconomics.html

    • All comments are subject to editing for civility and for relevance to the post topic. I do this as a courtesy service for my guests, so that they won’t suffer any public humiliation from coming across as jackasses.

      I’m afraid that the link you supplied contained only a brief overview of some of the literature on supply-side economics. Do you have links for the actual studies you referred to? If so, I would be more than happy to review them.

  14. Quantum Windbag permalink

    Civility? I can repost my comments from here at USMB, want to bet that they would pass muster in the Clean Debate Zone? You edit the comments to make yourself look smarter.

    • The standards I set for this blog and the standards set by the USMB staff are two different things. You can accept my standards, or you can refrain from posting. There are no other options.

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