A sadly understated economic law

by ammophila

Editorial note: I have decided to overrule the fad among my young contributors for using an initial or sobriquet instead of their full name.  From this date forward please note that writers must give a real name, even if it is not their own, and also at least a figment of an address.  I must also very definitely dissociate myself from the view expressed in the following item.

One does not hear much talk about the trickle-down theory of wealth these days but the assumptions behind it still seem to be holding up well.  The idea, roughly speaking, is that if you get a stratum of serious wealth in any given area then its members will, to put it crudely, spend their money in diverse ways thus spreading wealth through the community.  They will buy goods, engage services, and start businesses.  They will buy cars and pianos, employ butlers and drivers, and establish media companies.  Then the shopkeepers and the butlers and drivers and the editors will have more money than they ever had before, and in their turn they will spend more on the things they want, need and like.  And so on all the way down the economic slope.  As in all the most comforting fairy tales, it leaves everyone better off.  Therefore we should always fight for rich people and rich companies to have the lowest possible taxes, to help the whole wonderful process to work (and it is said some governments even hand out free grants under the name of privatisations to promising candidates to make sure they have enough wealth to keep things going).  But all this is rather abstract stuff.  Let’s try to envisage a practical example.  Let’s take a large group of bankers fleeing their native country somewhere in Asia perhaps, to save their lives and wealth after a leftish government has somehow got elected.  They decide to settle together on the pleasant island of Arbyesse in the Bay of Bolivia, which up to now has maintained a moderate prosperity on the basis of fishing, tourism, and the manufacture  and sale of artefacts attributed to the first bronze age settlers.  The first thing that happens is that they buy the finest houses on the market for their families, equip them with the most modern computer systems, and furnish them with exquisite period furniture bought after whirlwind shopping expeditions to Paris and Hongkong.   You will notice at once that the latter two forms of expenditure do nothing for the local economy, but for now let us pass over that point.  After that they set up a new bank employing some dozens of local staff, some formerly unemployed but most of them attracted by the higher pay from their previous jobs in various local businesses.  The bankers also establish firms dealing in financial investment and advice, facilitating of course dealings with their own previous contacts in other countries.  The purchases continue, notably including two private yachts but also a number of expensive cars (which naturally have to be bought from overseas firms).    They are careful to adopt a low profile in local life though some do offer support for one respectable local party, obviously well-favoured by the population since it wins the next three elections in a row.  Investors and friends of the bankers overseas see Arbyesse as a stable, investible target and pile in.  Hotels are built and infrastructure projects take shape.  So the economy after a few years achieves substantial growth.  Local construction companies (in which the bankers have invested heavily) have done well, as has the airport (foreign-owned).  There is a new ‘Omnimercato supermart’ with 60,000 different kinds of items, on the site of the old vegetable market, which still exists but has moved to a convenient site near the lagoon south of the capital.  Shopkeepers, and owners of other small businesses like the smith who turned his hand to making ornamental ironwork drive respectable cars.  But one night a young trainee accountant, cycling home after a celebratory dinner with some friends in El treinta de julio, a beachside café, noticed several down-and-outs sleeping in doorways, something he had never seen as a child.  He thought about it when he got home, and these thoughts led him by chance to realising that though he seemed to be earning quite reasonable pay, somehow he and his wife still could not afford to buy a number of desirable additions to their home, and had to be very careful with their monthly expenses.  She commented that it was much the same for most of her friends, while her aunt, though married to the man who had successfully turned his small taberna into an upmarket wine-bar specialising in imported wines, was always ready to deplore the drain on her purse when she went to the Omnimercato, and to denounce her husband who insisted they must save one more year for the bathroom suite she had set her heart on.  The accountant, Federigo, became curious and he found it quite easy to get information, sometimes in detail, about the assets of other inhabitants.  It seemed that typical members of the uppermost stratum had assets that would compare quite favourably with those of wealthy individuals in advanced countries.  The next level, senior managers in the construction companies for example, were also quite well off.  But as one went down the scale it seemed that the level of wealth diminished, not just individually but when all citizens of that level of the economy were added together.  He also tried to find comparative data on incomes.  This was harder since the tax authorities were rather more conscious of confidentiality than the private branches of the wealth system.  Nonetheless it seemed that a similar variation existed there.  The most striking thing was that in both cases it appeared that the figure dropped to zero before one reached the lowest band of the population.

            Perhaps foolishly, he started talking about his findings in company.  He was frankly puzzled as to why the ‘ever more vibrantly pulsing economy’ (to quote from the Trombón del Amanecer) pulsed so feebly in its lower depths.  Most who heard him did not share this reaction; they simply regarded it as a natural aspect of human existence.  However, he was finally offered the reason, at a gathering over a few beers one evening with some friends as the rain lashed down on the same beach-side café, the night before he was arrested.  Once again he plaintively voiced his puzzlement and once again saw the same resentful but apathetic impotence.  As often, one of them muttered about ‘all this money around.  Not much filtering down to us.  The only thing that filters down to us is higher prices’.  This time, however, the amiable Irish beachcomber in the corner, a regular customer over many years but one who rarely spoke, added an unexpected coda.  “It’s just what you should expect, you know.  The economists don’t like to talk about it much, but it is an economic law.  ‘Prices rise to meet the money available to pay them’ .”

Brandon Fitzhenry

Chicago

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