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Andres Aullet

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Trickle down vs. trickle up

The more businesses are left alone to do what they do best (sell a product or service), free from regulations, external influences and excessive taxation, the better they will be.

Loans and extra profits can be then used for more business creation and business growth, which in return drive more economic prosperity for investors, and that also "trickles down" to workers (as jobs and better salaries) and consumers (as lower prices) and everybody benefits in the end.

Or so the story goes.

Although the theory says that when investors gets richer, they use this extra wealth to promote more businesses, and in the process creating more jobs and driving prices down through specialization; there are many examples where the extra wealth is either just accumulated, or it is invested in ways that do not create jobs nor drive prices down.


Would things work in reverse?

What if individuals rather than businesses were the recipients of loans (micro), left alone to do what they do best (which i contend is creativity), as free from regulations, external influences and excessive taxation as possible.

They would then require raw materials and more people to put their ideas into action, they would need products and services offered by bigger businesses. In the end, everybody would benefit and the economic prosperity would trickle up

Obviously, this is an idealization.

But, could we benefit from a balance of both approaches?

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    Nov 3 2012: "there are many examples where the extra wealth is either just accumulated, or it is invested in ways that do not create jobs nor drive prices down."

    Can you give us a few examples of the many?

    All new jobs come from small business all small business is started with investment from somebody. The small business owner is an individual or a small group of individuals.
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      Nov 3 2012: Hi Pat,

      Even though i do not entirely share the point of view that it is the investor who creates value (without accounting for the value that creators and workers bring), I do share with you the opinion that small businesses are indeed the main driver of most new jobs.

      Now, as for the example, just look at the profits posted by any of the big oil companies in the past 10 years. Then let's compare it to the number of jobs they have created, or the improvements in their industry that have resulted in lower costs and hence better prices for consumers.

      That is one example, but it can be found in other industries (the Financial Sector comes to mind) as well

      cheers!
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        Nov 3 2012: by example I mean examples not conjecture.

        ALL of the new jobs are created by small business, this is the core of the free market. E.G. LED lights come along and take market share away from existing light bulb manufactures. Existing business s shrink and expand but the aggregate is no new jobs.

        Anyway the key is to nurture small business investment. Which is the absolute problem with the existing administration.
        • Nov 3 2012: Unless you count General Electric as a small business the LED light didn't come from small business. Big business and small business both create jobs and both receive investment money, however this does not mean all the money rich people have goes towards investments that create jobs. Speculation on precious metals, real estate, food and oil are examples of investments that create neither jobs nor wealth.
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      Nov 3 2012: ahhh you are going to make me go dig numbers Pat! but it will be a good exercise

      I agree again, small business investment should be nurtured

      By the way, how small is small in your view?
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      Nov 3 2012: Anders and Pat, Anders you sated " ... the value that the workers bring" That is straight from Karl Marx. His thought was that the value of the product was in the craftsmen not the demand for the product itself. On the other hand the Economist Adam Smith recognized that the free market was the single source of the wealth of nations. He also penned a book of the same title .. which is good reading ... hint hint. In his travels he saw the results of the goods from England and the goods from France brings prosperity to both nations and gave truth to the free market system and the supply and demand of the consumers. Money standing still was losing money and therefore investors were sponsoring new businesses .... for a fee. If the demand existed then the small business grew and the cycle repeated itself. The investor, the firm, and all employees benefited through this trickle down economy of free market, capitalism, and supply and demand.

      Pat did I get this right? Bob.
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        Nov 6 2012: Hi Bob,

        Thanks for the reference, indeed I have been fortunate (or at least more fortunate than unfortunate, wink wink back) to read Adam Smith and his wealth of nations.

        But even though i enjoyed reading it, i would not go as far as to say that Adam Smith's theory works flawlessly.

        Later, though, Krisztian was kind enough to point me to the von Mises Institute's website (mises.org), where i have learned a lot more about the austrian school of economics and the free market theory.

        Also, many years ago, I went through Das Kapital, and i found it a dense read, with some good as well as some not-so -good parts.

        I am not an economist, by far, so my opinion is that of a newbie. But the issue i see with the work of Smith and the work of Marx (and even the work of von Mises himself), is that (again, in my opinion) they fail to account for a few things:

        1) prior to the invention of money, humans were able to survive for thousands of years, and the use of common "property" was much more prevalent than individual property. Reading Smith, Marx or von Mises, it appears as if human history prior to the invention of money/economics is negligible. Human history is much older than civilization history. And this is relevant because basic human needs have not changed since humans first walked the planet, and basic human needs play a role in any economic system.

        2) According to what is now understood in cognitive science, humans are not truly rational agents, and the decision making mental process does not (by far) have the blind and consistent objective of maximizing individual economic gains

        3) With enough capital or access to resources, demand can be manipulated, thus making the demand based value a bit less accurate than it sounds in theory. Expecting that an invisible force will always flatten this altered demand seems to require certain amount of blind faith

        Of course, it is entirely possible that i got it all wrong

        cheers

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