Got to find the reason, reason things went wrong…

I once attended a forum for black students held at York University, where there were a number of seminars and sessions to try to broaden the discussion and (I guess) impart some life skills. One of these forums was about developing and harnessing economic power, moderated by two women who had a successful business consulting firm. Some of the stuff was useful (invest in real estate, work closely with other black businesses to keep money ‘in the community’), while some of the stuff was a bit… different (sell your real estate and buy platinum bouillon!). In a fit of mysticism that I have found to be distressingly common among black intellectuals, they encouraged us to think of ‘money’ as part of an acronym:

Mobilize Our Natural Energy Yield

Which is, y’know… not where the word comes from, but whatever. Small quibble.

The point of the acronym was, I think, to divorce our minds from the concept that paper money is actually worth something in and of itself. Money is, and always has been, a proxy for the time and skill that goes in to the production of goods or services. Since its very early days, it has grown and expanded to represent a lot of other things as well, but at its fundamental level money is what you exchange for goods and services according to the level to which you value them.

The recent economic collapse revealed that our concept of ‘money’ had moved dangerously far away from anything resembling goods and services, and has instead mutated into a seemingly-arbitrary score that different groups use to decide who is better than the other. And when we started realizing “hey, wait a second, this whole thing is built on fairy dust and leprechaun tears”, it collapsed. But at some point, there was MONEY flowing between places, right? So where the hell did it all go? Did it just disappear into the ghost of the machine? Maybe. Then again, maybe not:

The world’s super-rich have taken advantage of lax tax rules to siphon off at least $21 trillion, and possibly as much as $32tn, from their home countries and hide it abroad – a sum larger than the entire American economy.

James Henry, a former chief economist at consultancy McKinsey and an expert on tax havens, has conducted groundbreaking new research for the Tax Justice Network campaign group – sifting through data from the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and private sector analysts to construct an alarming picture that shows capital flooding out of countries across the world and disappearing into the cracks in the financial system.


“These estimates reveal a staggering failure,” says John Christensen of the Tax Justice Network. “Inequality is much, much worse than official statistics show, but politicians are still relying on trickle-down to transfer wealth to poorer people. “This new data shows the exact opposite has happened: for three decades extraordinary wealth has been cascading into the offshore accounts of a tiny number of super-rich.”

In total, 10 million individuals around the world hold assets offshore, according to Henry’s analysis; but almost half of the minimum estimate of $21tn – $9.8tn – is owned by just 92,000 people. And that does not include the non-financial assets – art, yachts, mansions in Kensington – that many of the world’s movers and shakers like to use as homes for their immense riches.

(Click here for a map illustrating the scope of the problem)

The whole philosophy of ‘trickle down’ is seemingly absurd on its face. The idea is that the wealthy purchase goods and services, and the money leaks out into the economy at large as payment to those who provide those goods. The problem is that above some threshold, per-capita consumption tapers off. After all, there’s only so many yachts and private jets one can purchase before ze has to start buying extra homes just to contain them. If all the wealth is concentrated in the hands of people who literally cannot spend it fast enough, it’s just going to get sequestered and never make it into the economy.

Combine that with the psychopathic culture of the very rich whereby wealth is a status symbol (and once all of your material needs are met, what else is there besides status?), and you get a strong incentive to collect money and simply keep it. It serves no function, it cannot be exchanged for things of value because it is the only value. Any and all tricks that can be used to keep it accumulating are fair game. Removed from the context of actual production, it simply becomes a line-item to jealously watch like a giant economic Smeagol.

The counterbalance to that is taxation – taking money that is serving no purpose and putting it to use somewhere. There is zero material harm done to those who are taxed. There is a philosophical harm if you accept the axioms that money you earn is yours and yours alone, and that it is wrong to deprive someone of their property; however, that becomes a pretty abstract argument in the face of the harm being done to those whose economy and livelihood are devastated in order to satisfy a pathological desire to see an account balance grow.

It would be wrong to characterize the rich as maliciously greedy. While I am sure that avaricious, conscious, intentional greed exists in greater measure among the very wealthy, the problem is a culture that glorifies wealth as something other than a measure of hard work. There are no 92,000 people in the world who are worth trillions cumulatively. Nobody has ever worked that hard – there aren’t enough hours in the day. We can and must counterbalance this glorification of getting the ‘high score’, and the answer is to reject the ‘trickle-down bootstraps no-handouts’ nonsense that is passed off as legitimate economic policy and discourse.

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  1. smrnda says

    The thing is, nothing of value is produced without labor. What it comes down to is that other people worked, produced something of some value, and the revenues were taken by the people on top and it became a means of them asserting ownership over the whole system.

    I mean, seriously, let’s say all these rich people did nothing for a year straight. What would the world lose? If anything, we might gain something since they wouldn’t be trying so hard to strangle the rest of us. But if the actual workers quit, the rich would be out of food, out of resources, out of goods. They basically get to call the shots since when everybody else worked, they got the ‘points’ for it.

    Is there some way that the value of their assets can be voided and governments could move into some other sort of fiat currency, one based more on the actual level of resources available for consumption?

  2. says

    Ever since I learned basic chemistry, I’ve seen ‘trickle down’ as a brilliant bit of smoke and mirrors. It’s a linguistic trick. You take a valid analogy to physical processes- stuff up high flows down- and substitute vernacular understanding of the terms- the rich are ‘on top’. Money really does seem to behave alot like other things in the physical world: it accumulates in places where it is stable. Trouble is, if we use the conventions we use to talk about the physical world, the poor (who are very likely to spend money, since they have immediate needs and outstanding debts) are at the very top and the rich (who are very unlikely to spend most of their money) are at the very bottom. If you really want to see the economy move, put money at the actual top- with the poor. I promise, the rich will find a way to get their cut.

  3. pipenta says

    “It would be wrong to characterize the rich as maliciously greedy.”

    Would it?

  4. says

    I think it’s overly reductive and puts too much weight on individual’s intentions. The more we study systems, the more we learn that humans react to environment very strongly. SO strongly, in fact, that we do ourselves a disservice when we blame internal characteristics. Besides, there are causation issues. Does being greedy make you rich? The other way ’round?

  5. 'Tis Himself says

    The point of the acronym was, I think, to divorce our minds from the concept that paper money is actually worth something in and of itself.

    Nothing, not a damn thing, has intrinsic value. Not gold, not oil, certainly not paper or bytes in a computer.

    I’d comment on the OP but unfortunately I have a prior commitment. But don’t worry, FtB’s token economist will be back in a couple of hours to bore you all to tears with an economics lecture or three.

  6. smrnda says

    I would actually argue that I think the rich are much more malicious than we think – it’s just that they’ve found ways of obscuring the reality of what they do. They have built a system where the details of what is done under their authority will be hidden from them, and they show no curiosity in finding out.

    I don’t think that people can be ignorant into the conditions that workers in many industries and places are faced with unless they really choose to remain ignorant. I’ve seen this when people get really angry when you point out that their high standard of living rests on exploitation. “How am I supposed to know that?” I get told all the time, and when I point out how to find out, the privileged jackass defends NOT wanting to know as a kind of sacred right – that even if you’re given a strong indication that other people have it *bad* and your politics or business practices might be to blame, that you have a right to demand that nobody try to correct your ignorance.

    Rich people are insulated from anyone who would hold them accountable for their actions, I’m thinking that’s how it’s done. But that’s a choice.

  7. says

    Trickle-down does work, but on very small scale. I spend a lot of time going to small towns in the midwest. When you see a town that has a local business (and thus a relatively rich person) the town has a look to it, more prosperous, in better shape, stuff going on.

    But this is the problem Small scale is, in today’s world, very very small. These global 92,000 people with trillions are not even remotely the same as some local fat cat in a town of 5000. And we have, at least in the U.S. this ability to understand things, often from experience, on small scale that simply are not true in large scale. How many people have met a millionaire – lots; or even a 10millionaire – still a lot; a billionaire – not very many; a trillionaire – oh, maybe the 30 in their inner circle.

    So we extrapolate small to large and don’t realize that doesn’t work and we’re being suckered for policies that are meaningless in today’s world, if they ever were.

    Its the same as you point out about taxes – tax me more, I buy less (so the taxes need to stimulate the economy more than my spending would in order for society to be better off). OTOH, cut taxes for the rich, there is no decrease in their spending, so even if the spending financed by the taxes has limited stimulatory effect it’s still a net gain (and actually for the rich too, since they’re just skimming off the top, so a bigger economy means disproportionately more for them anyway).

    Piling up money in a big unused pile just stinks.

  8. CT says

    I really wanted to post an insightful comment but I just realized what I think of as ‘rich’ is totally not what everyone else thinks of as ‘rich’. lol Great article tho.

  9. says

    That’s not “trickle down” though. That’s just capitalism. If people are employed in an industry, they have money to do stuff with. “Trickle down” means that their salary is expected to come from the excesses of the rich guy who runs the business. There are comparatively few towns where a rich person lives in the middle and then everyone else is hir employee, working to provide hir with luxury goods.

  10. 'Tis Himself says

    There have been other periods of widening economic inequality in the US. The Gilded Age of the late 19th century and the boom times of the 1920s come to mind. Both were marked by high levels of inequality and corruption, including in the political process (such as the notorious Teapot Dome Scandal that marked the beginning of the 1920s). In fact until the middle part of the last decade, income inequality had never reached the levels of the 20s. Of course, some of those who made their fortunes in both periods made great contributions to our society–the Robber Barons building the railroads that transformed the country or James B. Duke who was instrumental in bringing electricity to parts of America. But both periods were also marked by speculation, instability, and excess.

    There are some, like Edward Conard in his book Unintended Consequences, who argue that extreme inequality is not a sign of deep trouble but in fact something to be celebrated. The wealthy and their Republican sycophants argue that greater inequality is good because as rich people accumulate more money, they will invest it and improve the economy. Further, their wealth is proof positive of their contributions to innovation. There are so many problems with this view it is hard to know where to begin. Lets consider three.

    First, it is based on the notion of “trickle-down economics,” the idea that if those at the top do well, so will the rest of society. But the evidence is overwhelmingly to the contrary: the real income (adjusted for inflation) of most Americans today is lower than it was almost a decade and half ago, in 1997.

    Secondly, it is based on the fallacy that inequality is good for economic growth, but again, the evidence is to the contrary. Time and again, inequality has been shown to retard economic growth and promote instability. These are findings based on mainstream studies. Even the International Monetary Fund, not known for its radical economic stances, has come to recognize the adverse effects of inequality on economic performance.

    Thirdly, it is not true that the extremely wealthy use their money to take innovation-driving risks. What we have seen quite clearly is that a much more common use of wealth is to gain advantage in “rent-seeking.” When small groups of people have disproportionate wealth, they will use their power to seek special treatment from the government. Some of the wealthiest (historically, and even today) have gained their riches by the exercise of monopoly, preventing others from competing with them on a level playing field. Such rent-seeking behavior is a terribly inefficient use of resources: Rent-seekers don’t create value. Rather, they use their privileged positions in markets to capture larger and larger portions of existing value. They distort the economy, lowering efficiency and economic growth.

    The real drivers of growth and innovation are young businesses and small- and medium-sized businesses, especially in high-tech areas, typically based on government-supported research. Part of America’s problem today is that too many of those at the top don’t want to contribute their fair share to these “public goods,” with many paying taxes that are but a fraction of the rates paid by those who are much less well off. But it shouldn’t be a big surprise that some of the wealthiest Americans are promoting an economic fantasy in which their further enrichment is beneficial to everyone.

    In the “recovery” of 2009–2010, the top 1% of American income earners captured 93% of the income growth. I don’t think Conard will persuade the nearly 23 million Americans who would like a full-time job but can’t get one to find comfort in that.

    It’s hard to pinpoint a single moment that economic inequality began, but clearly the election of Ronald Reagan represented a turning point. In the decades immediately after World War II, we had economic growth in which most people shared, with those at the bottom doing proportionately better than those at the top. It was also the period that saw the country’s most rapid economic growth. Among the precipitating events leading to greater inequality were the beginning of the deregulation of the financial sector and the reduction in the progressivity of the tax system. Deregulation led to the excessive financialization of the economy–to the point that during the period 2000-2005 40% of all corporate profits went to the financial sector. And the financial sector has been marked by extremes in compensation at the top, and has made its profits partly by exploiting those at the bottom and middle, with, for instance, predatory lending and abusive credit-card practices. Reagan’s successors continued down the path of deregulation. They also extended the policy of lowering taxes at the top, to the point where today, the richest 1% of Americans pay only around 15% of their income in taxes, far lower than those with more moderate incomes.

    Reagan’s breaking of the air-traffic controllers’ strike is often cited as a critical juncture in the weakening of unions, one of the factors explaining why workers have done so badly in recent decades. But there are other factors as well. Reagan promoted trade liberalization, and some of the growth in inequality is due to globalization and the replacement of semi-skilled jobs with new technologies and outsourced labor. Some of the increase in inequality common to both Europe and America can be ascribed to that. But what’s different about America is the remarkable growth in incomes of the very top—especially the top 0.1%. This is orders of magnitude greater than in most of Europe and comes partly out of Reagan’s deregulatory fervor, particularly in finance, partly out of inadequate enforcement of competition laws, and partly out of America’s greater willingness to take advantage of inadequate corporate governance laws.

    Throughout its history, the US has struggled with inequality. But with the tax policies and regulations that existed in the postwar period, we were on the right track toward ameliorating some of that. The tax cuts and deregulation that began in the Reagan years reversed the trend. Income disparities before tax and transfers (help that is given to the poor through, for instance, food stamps) is now larger, and because government is doing less for the poor and favoring the rich, inequalities in income, after taxes and transfers, are even larger.

    Okay, lecture over. You can all wake up now.

  11. cgilder says

    I really really love your lectures. Much better than HS economics, and even economics camp (yes, that’s a real thing, and yes, I did it for 2 summers.)

  12. Azkyroth, Former Growing Toaster Oven says

    …also, I remember when the song you’re referencing in the title was all over the radio. I feel old now. 🙁

  13. says

    Thing is, their tax evasion doesn’t actually matter much. Since modern fiat-money issuing governments are not revenue-constraint, this removal of game tokens has only one effect and that it decreased aggregate demand, leading to the high unemployment rates we currently see. And yes, this has much to do with the shifting of income from wages to profits.

    What is required to fill this demand gap is simply public spending – ideally by hiring and paying people directly, giving them the opportunity to consume, a bit less ideally by investing, for instance, in infrastructure projects that spur construction income. This was actually the policy followed in the post-WW2 period up to the seventies. However, neo-liberals used the oil price shock to push their (entirely political) agenda and the drive towards reduced public spending, privatiation, deregulation etc was off. Reagan (and Thatcher in the UK) were only the tools for a change that had been advocated by others (Friedman, for instance).

    The problem is that while neo-liberal economic policies have cause the mess we’re currently in, their underlying narratives are still accepted. The tax-evasion report is a prime example for this: it makes it appear as if this tax evasion has someone stripped sovereign government of spending power and needs to be addressed before public spending can resume while this couldn’t be farther from reality. But if the narratives are not changed, there will just be some lipstick on the neo-liberal pig but the inequality-producing policies will continue.

    Now, should, after public spending has closed the demand gap, all those wealth holders decide to inject their monetary assets back into the economy, this could lead to inflationary pressure, eating up income gains of non-rich. It is at that point that taxes on the rich are needed to siphon off some of their spending power.

    Bill Mitchell explains it in more detail and much better than I can.

  14. F says

    Delivered as promised, minus the boring. It’s always a treat to read your economics lectures.

    This one made a fine addition to the Crommunist’s already awesome and interesting post.

  15. Patrik Roslund says

    Vote socialist. ohh wait you don’t have em do you? =/ Why do you guy’s across the pond miss half of the political spectrum again?

  16. Iain says

    I think “trickle-down” is the wrong rhetorical device to be attacking. These days, I only ever really hear the term – or the idea behind it – from those attacking it from the left. The rhetoric on the right seems to have shifted from “trickle-down” to “job creators”. This is a different argument, and in fact depends on the rich having more money than they can spend.

    The idea is that the rich are necessary, so we have an investor class to provide businesses with the capital they require to succeed. If everyone were spending all of their income, no-one would have any savings to invest. The rich businessman uses his surplus wealth to build factories that create jobs for the rest. (Note: the gendered language here comes from the ideology I am channelling.) Capital investment also increases productivity, which increases the potential for real economic growth. So that money in the Caymans isn’t just stuffed under a mattress, it’s invested in stocks and bonds which help businesses grow and employ more people. And taxing it would just suck money out of the productive economy and waste it on inefficient government spending.

    There is a kernel of truth in this story, in that a capitalist system does depend on there being a pool of savings that can be invested in businesses. But, of course, that kernel of truth in no way justifies the vast sums of money that are held by an increasingly narrow segment of the population. The evidence is pretty strong now that there is far too much cash tied up in investments, such that interest rates are effectively zero, and far too little cash in the hands of those who will spend it. Businesses are sitting on huge cash piles because there is no demand that would justify spending their revenues on new machines, etc. And most of the investments those trillions in offshore funds are parked in are chasing around in the financial services casino, which produces little of any value. Even when the economy is doing well, the excess of investment wealth creates massive bubbles, which damage everyone when they burst.

    Trickle-down is a ridiculously easy theory to demolish: The poor spend more of their income than the rich, so if you want more spending, give the money to the poor. Done. But I am struggling to find such a simple take-down of the job creators myth.

  17. says

    Well the easy take-down is “0% of businesses succeed without customers”. When there is no demand for goods/services as a result of money being essentially removed from the economy, there are no jobs to create. Saying that wealthy people get rich by creating jobs (and that if you make them even more wealthy they will simply shit out jobs) barely even qualifies as a half-truth. Demand creates jobs.

    You’re pretty much there already.

  18. says

    Do you mean real socialists or Hollande/Zapatero/Schröder “socialists”? The former are missing from most European parliaments as well, while the latter did nothing to reverse neo-liberal trends.

  19. says

    No, no, and no again. There is no need for savings to finance loans, which in turn also means that there is not need for savings of the rich for investment. The need for this pool of savings existed under the gold-standard system but has been left behind for decades now.

    What is needed for banks to give loans are credit-worthy customers, and was is needed for “job creators” in the first place is increasing demand. Which is best created by public spending.

    Once again, Bill Mitchell to the rescue.

  20. says

    Yeah, I’d like to emphasize that the whole “savings as a vehicle for investment” concept is more myth than fact. The actual financial system never has anything close to the amount of outstanding loans in actual savings. That’s what it means to have a fractional reserve system.

    Furthermore, any government with a fiat currency can simply create money. This happens not only with the printing of currency and the minting of coins, but also in deficit spending. The only real constraint is inflation, but it’s possible to predict and forestall significant inflation. So long as interest rates are low and unemployment is high, for instance, the threat of inflation is minimal.

    It’s obviously important that any investments made, regardless of how they’re financed, are relevant and effective. Bubbles form primarily due to capital-rich actors following a herd mentality in over-investment in a particular sector of the economy, combined with heavy-handed opaqueness such that the public has no idea what is going on and a lack of any intervention on the part of the government to get to the bottom of it (let alone directly alter the situation). The recent housing bubble, for instance, was caused chiefly by banks deciding to lend as much money as they could to anyone they could in an attempt to maximize short term profits on fees and variable interest rates. Simultaneously, they were making gambles with other banks on the stability, credibility, and value of derivatives packages supposedly (but not actually) backed by this over-zealous lending.

    Whenever you have powerful actors working unchecked, beware; there’s probably a scam in the making.

  21. Holms says

    On the subject of value, I found this little series that neatly explains the mentality involved, provided you can get past the lousy acoustics. Honestly, why the hell would you choose to record a speech in a room where the nearby traffic is audible?

  22. M Groesbeck says

    The recent economic collapse revealed that our concept of ‘money’ had moved dangerously far away from anything resembling goods and services, and has instead mutated into a seemingly-arbitrary score that different groups use to decide who is better than the other.

    I’m not sure that money (or any sort of formalized symbolic exchange as an economic requirement) has ever really been other than what it is now. By flattening the whole convoluted and deeply subjective concept of “value” into a faux-objective one-dimensional metric with the exchange of socially-ordained fictions taking the place of exchange of actual labor and goods, money works brilliantly for hierarchical social engineering. (It’s baked so deeply into the system that even Marx basically accepted the capitalist metaphysics of exchange; his main objection was that points were being rewarded to the wrong people, not that money makes a mockery of the idea of apples-to-apples comparisons.)

  23. hypatiasdaughter says


    And taxing it would just suck money out of the productive economy and waste it on inefficient government spending.

    While government spending on “stupid” things often makes one want to do a “head desk”, it isn’t wasting money – unless they are shoveling it into a rocket ship and firing it at the sun. It gets used to purchase goods and services, which creates demand and makes jobs.
    The worst thing about government spending is that it is not responsive to market forces. Bad ideas can be promoted and kept going past their usefulness because one votes to finance them. In the private sector,”if the idea fails, the business bails”.

  24. says

    Bad ideas can be promoted and kept going past their usefulness because one votes to finance them. In the private sector,”if the idea fails, the business bails”.

    Which might be news to quite a few businesses which, when their private sector endeavors failed, turned to father state to keep them going. 🙂

  25. says

    Woah, you’re addressing a lot of issues in such a small paragraph 🙂

    First off, you’re of right to a certain degree about the effect that money as the sole token of value has on societal make-up. The part that still confuses me is that quite a few people who are familiar with other tokens of value insist that money is the best score-keeper. I keep trying to make the counterargument with pointing towards people that play non-professional sports (or for that matter, tank in World of Warcraft) for nothing but the achievement and the respect of their peers. And even though most people have experienced such situations, they still claim that money is the main motivator for people.

    In fact, our very own crommunist showed himself to be on the fence, when he argued in the comments to a past post that material rewards are at least part of the motivation for creative people.

    You’re doing Marx an injustice, however. At the latest with From each according to his ability, to each according to his need he envisioned a society beyond money and the exchange system. What you will notice, on the other hand, is that he still accepted the primacy of labor.
    This primacy is still accepted everywhere as you see in the current discussion: we discuss how to get people into jobs (i.e. by public spending). We don’t discuss that at the current standards of productivity it is ridiculous to have people working 8 hour shifts (plus overtime) each day while others are unemployed. (And yes, this is tied to money. As Mitchell writes: “Money creates unemployment.”) Since I prefer pointing to others who make my point better, I recommend Russell’s In Praise of Idleness where this was laid out almost a century ago.
    But since it’s almost impossible to motivate capitalist producers to move towards a different use of labor (it does remain cheaper to work an employee long hours than to have him turn over his job every couple hours/days), the “small” solution is the one Mitchell argues for: having the state fulfill people’s need for salaried employment…which would also allow to redefine labor so that it includes activities that the market currently doesn’t value.

    The last point, and the one you started with, is that money has always been what it is now. And there I’d disagree: you start with money referring to tangible things, coins even having a concrete gold/silver-content (although this of course only means that one has moved the value signifier to something else that has no objective value, Ayn Rand be damned), and we actually kinda kept to this through the early twentieth century. Afterwards, however, there was no justification anymore to think in the old categories of limited amounts of money, so to say, and money became something that could be used in different ways to shape society (by aiming for full employment, redistribute wealth etc) and was used in this manner by most governments after WW2.
    So from our current perspective we have two progressive directions: one of using fiat money to create less unequal societies and redefining labor as we do, the other of aiming to replace the money-value/exchange system and breaking labor’s primacy. I am all for the latter but given that large parts of the power elites in fact favor a regressive direction, back to semi-feudalism and very unequal societies, I feel that we have a better change pushing for the former (which also has the attractive feature that it has been empirical shown to work).

  26. Flex says

    Late to the game as usual,

    But one idea I have been mulling over for the last couple years is that bank loans are superior in generating economic growth when compared to private investors.

    Two scenarios, simplified.

    1. Someone wants to start a business. Creates a great plan, goes to a bank and gets a loan. Business is successful. Bank loan gets repaid at the rate originally agreed upon, once loan is repaid owner can use additional profits to improve business or pay off other debts/improve their lifestyle.

    2. Someone wants to start a business. Creates a great plan, finds a private investor who provides the start-up funding. At this point the private investor doesn’t just have an outstanding loan in the business, but owns a part of it. The private investor will get a cut of the profits for as long as the business operates.

    The difference is that the bank isn’t really interested in anything more than getting their money back, while the private investor is interested in getting a permanent share of the profits.

    Without looking at numbers, my suspicion is that in scenario 2 the entrepreneur will have less overall profit to either invest in the business or take for personal use. In other words, the person doing the work will get more reward if they can get a bank loan over a private investor.

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