Trickle-down economics: Does wealth redistribute itself?

Wealth redistribution refers to policies that take wealth from one group of people (often the rich) and give it to another group or the rest of society, often with the aim of tackling inequality. The arguments over wealth redistribution gets to the heart of many of the political questions of economics; is it a good idea to raise taxes or should businesses be more regulated?

The main argument against any kind of wealth redistribution structural change is what’s known as ‘trickle down economics’ (which is also known as supply-side economics). It basically means that the best way to stimulate economic activity is to invest in capital, i.e. something that’s used to generate wealth or produce other goods. The idea is that if we lower the amount of tax and regulation on capital, that’ll encourage business owners to create jobs and produce goods more efficiently. So if the rich are getting richer, it doesn't really matter, because their wealth is generating more wealth for everyone - a win-win situation.

A lot of people are doubtful about this idea.¹ Capitalists do invest in new industries, but don’t necessarily create jobs. In India, GDP grew at almost 9% per year between 1980 and 1991 but employment grew at just 0.53%, demonstrating that GDP gains didn’t actually trickle down the workforce². When inequality is so high, it’s difficult for someone who begins life on a low-income to ever save enough wealth to become a capitalist themselves. An economic study in 1999 showed that higher inequality was actually linked to lower growth in regions where income per head was under $2000 a year, which is the case in many countries round the world.³

So what do the people asking for structural change suggest? Some want to make workplaces more democratic, for example, through employee ownership, employee representation in board rooms, or the creation of cooperatives, organisations run jointly by their members. Others suggest land reform, breaking up the huge stretches of land that families have owned for generations in certain parts of the world and redistributing them to solve the problem of unequal ownership of capital.

A lot of people don’t like these ideas at all, saying they undermine incentives of competition and will lead to an inefficient economy. However we decide to organise our economies, it’s important to recognise how much the underlying structures matter.