Trickle-down economics, or why you have a computer or smartphone

Many on the left do not understand how “trickle-down economics” works. The more accurate name is “supply-side” economics. Colloquially it’s been called Reaganomics, though Reagan was hardly its first advocate.

To understand supply-side economics, you need to first understand how markets work, specifically the law of supply and demand. Just by that name, it should be quite apparent how supply-side economics is supposed to work. But largely we end up with misrepresentations such as this:

Trickle down economics do not work. Otherwise, all the wealth would not be hoarded by the top 1 percent. You’re welcome.

My reply to seeing this was pretty straightforward:

Welcome for what? Clearly by that statement you don’t know how to define wealth.

If you’re defining wealth only in terms of cash, then no, trickle-down economics won’t work. But it was never about cash. It’s about investments and wealth as defined in terms other than cash. And if you define wealth properly, trickle-down economics has worked.

You’re sitting in front of proof of that.

The rich aren’t hoarding cash. That’s the biggest fallacy a lot of people have about them. The net wealth of the wealthiest people in the world isn’t cash. Sure they do have a lot of cash in the bank. But Bill Gates isn’t sitting on $50+ Billion in cash.

But I don’t have time to explain the intricacies of economics and supply-side (aka “trickle-down”) economics and how it has worked. Again you’re sitting in front of proof of how it has worked and does work.

You’re welcome.

The law of supply and demand, in short, presupposes that items and services that are traded have both a supply — someone to provide the item or service — and demand — someone willing and able to buy said item or service. Suppliers have two options in the market: either chase existing demands and needs, or create something that will, hopefully, create its own demand.

A clear example of this is the iPhone. Until the iPhone hit the market, there really wasn’t much demand for smart phones outside the business and enterprise sector. The phones that did exist were “smart enough”. And most of what was offered with regard to smart phones was tailored largely for that market. Until Apple started developing the iPhone. What made the iPhone unique is the market it targeted: the common customer. It wasn’t aimed at enterprise.

When you chase after existing demands and/or needs, that is demand-side economics. The pharmaceutical companies are a clear example of this: they can only ever chase after demand (the need to treat and prevent diseases and disorders) and can never operate on the supply-side of the curve. This is one reason new drugs and treatments are so expensive at introduction: prices can only come down as supply goes up to meet demand. Until then, many will be priced out of the market for that drug, but it requires others buying those drugs to help bring prices down — it’s a rather interesting paradox of market economics.

But when you innovate with the attempt to create new products and/or services that did not previously exist, that is supply-side economics: providing supply to generate demand, as opposed to trying to provide supply for existing demand.

Much of how supply-side economics works, however, is through investment. Again, as I said above, it is never about cash. And the world’s richest aren’t sitting on billions of dollars in cash, but billions of dollars in securities representing investments in companies.

Investment is where supply-side economics happens. And most of modern life in the first world is testimony to not only how it works, but that it works. And works quite well.

But let’s tackle the wealth of the rich, and why the rich seem to only get richer. It’s simply about accounting. When a person invests their money, they are, in short, trading asset for asset when buying securities. The investment does not change the investor’s net wealth unless the value of the investment (the stocks or bonds received when the investment was made) goes down on the trading markets.

For example if you buy 1000 USD worth of stocks in Microsoft, your net worth hasn’t changed. Only the amount of cash you have changed. So if your net worth (defined as all assets less all liabilities) is 100,00 USD before buying the stock, it will still be 100,000 USD after buying the stock. But the value of the stock can change, and any changes in that stock will change your net worth.

This is why it appears the rich are getting richer. It’s all in how you define wealth. But, again, they’re not sitting on cash. Sure they have a lot of cash in the bank, and fractional reserve banking gives everyone else access to that money, but it’s a minority of their net wealth which includes real estate, ownership stakes in companies and initiatives, and securities.

So let’s go back to Apple a moment. If a rich person invests 1 Million USD in Apple to help them bring about a new product, and Apple’s stock goes up as a result, that investor’s net worth went up. That stock entitles the investor to dividends, which gives a cash return on their investment along with any change in value.

But until the investor sells the stocks, the investor is out 1 Million USD in cash. The dividends aren’t going to make that up for years. So are the rich “hoarding” wealth? Nope.

Instead their money is invested in many ways. They buy all kinds of securities, giving that cash over to companies to put to use. They put their cash into banks, thereby providing liquidity for fractional reserve banking to work. The money you were loaned to buy a house or car, and the money the builders and auto makers were loaned to build the houses and cars, is thanks to the rich making various investments in numerous different directions.

And those investments have “trickled down” to much of the middle and lower class in many ways. It’s merely the fact it hasn’t been purely in cash that has the left in an uproar.

Decades ago, even the Looney Tunes explained very succinctly — TWICE — how supply-side (“trickle-down”) economics works: