Thursday, November 13, 2008

Trickle Down Economics Busted. What now?

Trickle down economics busted here: In the Real World of Work and Wages, Trickle-Down Theories Don’t Hold Up

Wealth creation has been a noble pursuit. It was alright to dedicate oneself to the research and application of the latest management - financial and otherwise- thoeries to the creation of wealth. After all, every piece of the economic puzzle had it's place - they all worked in tandem and meant as well for the top 1 percent as to the bottom 10 percent.

Even development minded liberals did not have to be apologetic about aspiring for invidual riches by working up the innumerate opportunities for creating and capturing value. The larger the value created, the larger the impact. Richer you are, the better everybody was, including the bottom 10 percent.

Atleast this has been the logic of the trickle down economics. Atleast until the lower trenches and subsequently the rarefieds of the American economy bore the brunt in the current decade. Suddenly exploring the ugly behind of the theory has become fashionable. Even markets are found to have limitations.

India has been a living and breathing proof of both the limitations: that trickle-down theory and the "invisible hand" of the markets cannot reach across the inflection of the non-linearity - that serious handicaps in information and capital access can break the back of the linearity assumption of the theories. That incentives and self-interest driven economic participation dont work the same way - irrespective of whether you're in the top or bottom 10 percent. That whether you were obscenely rich or hunting for the next meal, whether you had a Harvard degree or only high school education, you did not react the same way to the incentives or had the same level of access to capital and information to be an effective participant in the markets.
Every beauty has it's patches.

It's a beauty that the current economic fiasco is attributed to the failure of the trickle-down theory and it's feedback upstream. Somehow, when you factor in globalization - ushered in largely by the Internet and the bursting developing world population - and ever increasing opacity of risk instruments, this seems to be a pretty case of drawing right conclusions from wrong lessons.

In any case, we needed to wait for experience to affirm scientific intuition.

But once we realize the broken linearity of the effect of incentives and access(to capital/information), is development such a divergent path from the one of wealth creation? Is there a possibility of reconciliation?
What does it mean for development-oriented liberals who are young enough to choose which path to take?

Another time!

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