Thomas Piketty is a French economist who recently took the economics world by storm. He demonstrated that, in a modern, “free-market” economy, growing inequality is inevitable, unless we do something deliberately to counteract it. Piketty shows that, over hundreds of years and in technologically advanced economies in particular, the return on capital will always rise faster than the growth rate in the economy as a whole. The rich, in other words, will inevitably get richer, while the rest of us get comparatively poorer – and sometimes absolutely poorer as well.
It was only in exceptional times – for instance, in the period immediately after the Second World War – that we were able to buck this otherwise inexorable trend, and that was only because we elected governments that were inspired by post-war optimism to make a fresh start – to try consciously to create better and fairer societies, and to include everyone in what was hoped would be better times.
But, in New Zealand and the UK and in most of the western world, the long-term trend is now back. The gap between rich and poor is widening again, and more rapidly, and – in the absence of governments willing to do much about it – it will go on getting worse. We are constantly urged by the wealthy, and by politicians representing their interests, to accept that it is good for all of us that the rich should go on getting richer. Wealth at the top will, we are told, “trickle down” to benefit the rest of us. This, it is argued, is the mainspring of economic growth; if we interfere, then the economy as a whole will slow down and we will all be worse off.
The “trickle down” theory enjoyed a considerable vogue for a time, and it has certainly been given an extended trial period. But the results have confirmed the doubts of the sceptics. Gravity, as an economic driver, doesn’t seem to have worked too well.
Not only have the poorer sectors of society continued to miss out on the prosperity enjoyed by the better-off, but the economies which have most assiduously applied the theory have done worse in economic terms than those (in Scandinavian countries, for example) which have consciously tried to maintain a reasonable degree of wealth and income equality.
The reasons for this are not hard to find. If most new wealth ends up in the hands of those who are already wealthy, (which is exactly what has happened in much of the post-war world), it is odds on that much of it will be hoarded or used to produce an unearned income or spent on conspicuous and non-productive consumption.
To the extent that it goes into productive investment, it will be spent on new capital equipment, which does little for the jobs and wage rates on which the poor depend but simply extends the income-maximising advantage enjoyed by the wealthy.
It has always seemed to me that the metaphor that envisages money as a liquid that “flows” or “trickles” downwards is a misconception of what really happens. Rather than hoping to see money automatically “trickle down” from the wealthy, in the vain hope that it will somehow reach those who need it, it is surely better to direct money quite consciously into the hands of the poor where it can do most good and so that it can “bubble up”.
It will then benefit us all since we can be very confident that every dollar in the hands of those with little money to spare will be spent and will do much to alleviate poverty. Every cent will then bubble up through the whole economy, like yeast in dough, passing through one set of hands after another, the increased purchasing power and demand providing higher incomes to tradesmen, small shopkeepers and businesses, and in turn leading, as the great John Maynard Keynes argued, to increased economic activity and to more employment and investment.
We pay a heavy price for failed “trickle down” policies – not only a poorer economy, but a weaker and less integrated society as well. Why not give “bubble up” a chance to build a stronger economy and a healthier and happier society?
Bryan Gould is a former Labour MP and a former member of the Shadow Cabinet