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February 12, 2025
What is Trickle down Economics, Why it Became Popular, and How it Works in Practice
In economic theory, the concept of Trickle down Economics has a prominent part in the evolution of modern and especially, post modern nations.
Indeed, Trickle Down Economics as an economic paradigm for countries become popular during the 1980s when the then President of the United States, Ronald Reagan, and the then Prime Minister of the United Kingdom, Margaret Thatcher, started implementing this theory in their countries.
Basically, Trickle down Economics, as the term implies, states that as the wealth generated by the top percentile of the Income Pyramid increases, it trickles down the Pyramid, benefiting those at the middle and the lower ends of the income ladder.
In other words, what this theory is all about is that nations grow by investing in wealth producing activities by the top earners, who in turn, employ workers and others who in turn spend and help businesses, thereby leading to a cycle of prosperity where ultimately, all benefit.
While there are many criticisms of this theory from leftist economists, there is enough evidence to show that this theory worked in the 1980s and the 1990s when poverty reduced.
What the Example of Infosys and NRNs Driver Show About How the Theory Works
However, Trickle down Economics works only when the top of the income pyramid invests their wealth in productive activities and not in hoarding their savings. In other words, wealth trickles down only when there is enough investment in job creating activities.
For instance, in India, the celebrated co founder of the Software giant, N R Narayana Murthy, insisted that everyone in this firm contributes towards productive activities benefitting the middle and the lower ends of the income pyramid.
Indeed, the most often quoted instance to show how Trickle Down Economics works is the example of how NRN’s personal driver received stock options and the gardeners and the administrative and housekeeping staff saw their salaries rise due to generous wages.
So, if Trickle down Economics has to work, then there must be wealth sharing and not wealth hoarding which is what is happening now, especially after the onset of the Covid 19 Pandemic.
Indeed, Trickle down Economics as a theory started losing popularity in the last decade or so since glaring levels of inequalities meant that wealth was not trickling down as expected and proposed by this theory.
Therefore, Trickle down Economics works in certain conditions and not in all conditions.
Why Trickle down Economics Stopped Working for the Benefit of All in Recent Times
Moreover, for Trickle down Economics to work, the governments must impose higher levels of taxes on the top of the pyramid earners so that some of such revenue can be reinvested in job creating and productive activities.
Of course, Trickle down Economics is an offshoot of Neoliberalism which states that Free Markets should be left unregulated to work on their own which does not always guarantee that they work for the benefit of all.
Moreover, under Neoliberal Trickle down Theories, there is often the criticism that while the government does not interfere in regulating markets, at the same time, it distorts the workings of the markets to favour the rich.
This is something that cannot be sustained if Trickle down Economics has to work.
This is the reason why there has been an upsurge of opposition to this theory in the last decade or so as people everywhere realized that while the wages of the lower end of the pyramid are not rising, the top earners find themselves getting richer.
Moreover, there has been a stagnation in economic growth rates that is leading to hoarding of savings and wealth by the rich and the middle class leading to much dissatisfaction.
How Trickle down Economics Can Regain its Popularity in the Present Times
Having said that, one cannot entirely dismiss Trickle down Economics as there were a couple of decades of widespread prosperity due to the Share of the Economic Pie being distributed in an equitable manner.
For instance, both China and India prospered due to adoption of Free Market Economics wherein Entrepreneurs invested in Capital Investments and Job Creation strategies that helped Millions of people emerge from poverty and into the middle class.
The point about Trickle down Economics is that it rests on the principle of equitable wealth generation according to the classic economic theory of division of profits between the owners of capital and the workers who work for them.
Therefore, it is incumbent upon the former to provide enough wages. Of course, the reason why this does not always happen in practice is that from the time of the Great Recession of 2008, there has been a tendency and a trend wherein wages and wealth have diverged leading to protests worldwide.
It is our argument that governments, if they are serious about Trickle down Economics, must ensure that they incentivize Entrepreneurs and Capitalists to produce and more importantly, share the produce with all in an equitable and just manner.
The Post Covid Economic World
Last, Trickle Down Economics is still popular among many economists, though in the wake of the Covid 19 Pandemic, there has been vociferous opposition as there is a realization that it benefits only a few at the expense of the many.
This is the reason why there is a need to rethink this theory in the larger scheme of things so that there is all round prosperity that is not limited to a few.
To conclude, Trickle down Economics can go hand in hand with Middle of the Ground Free Market theories as models for generating widespread and equitable prosperity.