Last week on the Deep End we tackled the notion of ‘trickle-down economics’, arguing that we should build prosperity from the ‘middle-out’ instead.

Writing for the IEA blog, Kristian Niemitz recommends a third direction for public policy, but before getting on to that, let’s begin with another of his points – which is that there’s no such thing as trickle-down economics:

“Over the last ten years, I have met all sorts of economists believing all sorts of weird things, but I have yet to meet a trickle-down economist.”

It’s true – the idea that wealth trickles down from the rich to rest of us is a political argument, not a serious economic theory:

“According to the way his critics describe him, the hypothetical trickle-down economist seems completely indifferent to how the rich have made their riches. If an actual trickle-down economist could be conjured up, he would presumably defend the fortunes of Sicily’s mafia, Colombia’s drug barons, and Putin’s oligarchs. Their wealth trickles down, he might argue, as they hire people to polish their Ferraris and fish the leaves out of their swimming pools.”

Niemitz is right to say that even if there some people who seriously believe this, it has “nothing whatsoever to do with free-market economics.” He might also have added that when certain free marketeers boast about how much income tax the rich pay (and I’m especially thinking of you here, Fraser Nelson), they are actually making a case for the redistributive intervention of the state, not the free market.

Furthermore, when rich people do help the rest of us get richer, it is through a process that is the opposite of trickle-down and which has everything to do with free-market economics. Niemitz focuses three specific examples – Ingvar Kamprad, Karl Albrecht and Michael O’Leary, whose respective businesses are IKEA, Aldi and Ryan Air:

“What these three have in common is that they found ways of stripping a product to its bare bones, and then cut the cost of providing it to a fraction of what it previously was. And while it was not their intention, they have also spurred competitors to cut their costs to comparable levels. As a result, low-income earners in contemporary Europe find groceries, functional furniture and the occasional flight more affordable than middle-income earners a generation ago.”

These men didn’t make our lives better because they became rich, rather they became rich because they made our lives better. They provided the breakthrough products and “only then, and then only gradually, did wealth ‘trickle up’ to them.”

This is a brilliant way of looking at the issue, but we need to be careful not to push the point too far. Access to cheaper and better products can only go so far in compensating ordinary working people if their incomes stagnate – especially when many vital goods and services, such as food, housing and higher education, are becoming less not more affordable.

Furthermore, not everyone who directly benefits from the concentration of wealth at the top of the income scale is doing so because they are value-creating innovators:

“Our problem is not that we have too many innovative, cost-slashing entrepreneurs. Our problem is that we have too many people who get rich not by means of market exchange, but through the zero-sum game of the political process.”

Niemitz gives various examples, not all of them good ones. He also neglects to mention some of the worst spongers – such as bailed-out bankers, corporate tax-dodgers and big polluters who are allowed to destroy the natural wealth and health of others. Nevertheless, the underlying principle is a sound one – which is that any discussion of the deserving and undeserving poor is incomplete without a parallel debate about the deserving and undeserving rich.