Harry S. Dent | Thursday, October 25, 2012 >>
At an amiable get-together one night, a close friend of mine piped up and said: “Trickle-down economics has never worked!”
That’s when I blew up and the occasion got a lot less friendly for a few heated minutes. In fact, I almost took his head off!
Because I have studied economic history for all of modern history and one thing is crystal clear to me: major innovations by rare innovators like Henry Ford or Steve Jobs et al have raised the standard of living of the average person unbelievably and unquestionably over time.
This is the “invisible hand” of free markets and economic evolution that Adam Smith first proclaimed in the late 1700s and that Milton Friedman clarified in recent decades.
You’d have to be an idiot to unquestioningly believe that trickle-down economics hasn’t worked…
Ford’s assembly line innovation moved the work to the worker’s station. It standardized production processes, parts and subassemblies. It increased worker productivity 10-fold and pushed their wages up as well.
The assembly line concept, among many others from the Roaring ’20s, eventually become common-place. In the process, it created the first great affluent middle class in history.
Now the information revolution, started by major entrepreneurs like Jobs and many others, will create the next such revolution in everyday work, productivity and earnings. Just like the effect of the assembly line, we’ll see these latest innovations change our lives for decades to come.
The truth is that radical innovations by those radical entrepreneurs in society (I’m talking about the 1% here, not just your typical small business owner) create greater productivity… which leads to higher wages… which leads to improved standards of living for the many.
What people like my friend miss is that it takes decades, not years, for these trickle-down impacts to occur.
But my friend was not wrong at the core of his insights that night…
Free markets, on their own, tend to shift too much wealth and power to the top 1% that create most of the innovations and wealth in our societies and economies. That tends to create tribal leaders… mafias… dictators… monopolies in business and those in power tend to garner most of the gains for their own interests.
It’s like the 800-pound gorilla that gets most of the food and women and everyone else fights for the scraps.
It was the marriage of free-market capitalism and democracy that created the explosion in standards of living from the late 1700s forward. The Industrial Revolution created a leap in machines, energy and new factory systems to propel productivity and wealth.
But the American and French Revolutions also created a natural revolt of “the people” who resented the excessive wealth and power of the few. Democracy, or trickle-down politics, demanded representation of everyone’s interest in the system… for their benefit as well as for the benefit of the dominant rich and innovative. That, combined with the explosion of free-market capitalism from the Industrial Revolution, created a marriage made in heaven for economics…
Our standard of living has exploded ever since, despite occasional major downturns and even depressions, all of which are a natural part of the capitalistic cycle of innovation and growth.
And this marriage is self-perpetuating. When more people benefit from new innovations through higher wages and input, they get more committed to the system and contribute more to it over time. It’s a win/win proposition!
So, the reality is that trickle-down economics does work. It works even better when the wealthiest contributors are forced beyond their natural selfish interests to spread the benefits to the middle class and beyond through democracy and trickle-down politics.
However, there is a limit to both. Our free market economic system went nuts with overexpansion of debt and growth in the last few decades. Now our democratic system will tend to balance that out with debt forgiveness to the many and better reforms for the future.
But we should not allow such obvious reforms to become too complex and overburden the very innovative free market “egg” that creates “the chicken” for everyone!
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