Trickle-Down vs Middle-Out Economics..The real history of economic growth

Eric Beinhocker of the Institute for New Economic Thinking has a piece on American economic dream gone wrong.

He first sums up how America moved from being what you know to who you know economy. Then he says US needs to go back to its core factor – rooting for middle class: The usual cited business of trickle down economics doesn’t work. What matters is middle out economics where middle class rules the roost:

Perhaps the most insidious narrative has been that of “trickle-down economics.” It has created the myth that helping powerful plutocrats is somehow the same as encouraging the free market. Orwell would have admired the doublespeak. But the true history of American capitalism has not been “trickle down,” it has been “middle out.” More than a century of private- and public-sector investments made American workers the most productive in the world. As labor productivity rose, so too did wages, creating the largest and most prosperous middle class the world has ever seen.

Middle-out economics is a principle that Henry Ford understood when he decided to pay his workers enough so they could afford to buy his cars. Entrepreneurs start companies not because of tax breaks, but because there are consumers out there who want and can afford what the entrepreneurs make. And most entrepreneurs don’t start rich; most start in the middle class or below. Steve Jobs’s father, Paul, was high-school educated and his mother was a payroll clerk—they struggled to send Steve to college. Sam Walton’s father was a farmer, and Walton started his business with $5,000 saved from his Army pay and a loan from his in-laws. Neither of these entrepreneurs would have benefited from tax breaks for the rich. Think of all the potential Steve Jobses and Sam Waltons who didn’t make it because their parents couldn’t afford to send them to college or because they couldn’t get a small-business loan. Government doesn’t make entrepreneurs, but it can help them help themselves.

Trickle-down economics may work in textbook economic theory with ivory-tower assumptions about perfectly rational people and perfectly efficient markets. But in the real world of politics and interests, it simply provides a cover story for rentier economics. It dresses up anti-market behavior in free-market rhetoric.

Other have presented Middle-out economics as a progressive argument—but it can just as easily be presented as a conservative argument. It is a call for a return to a truer form of American capitalism. It is an argument for going back to the values that have described American capitalism since de Tocqueville—competition, meritocracy, equality of opportunity, innovation, risk taking, and reward for hard work, self-improvement, and fair play. Both Randians and modern conservatives such as Koch claim to disdain rentier capitalism and celebrate these values. But what Rand’s acolytes, Koch, and the Tea Party fail to see is the constructive role government must play if these conservative values are to be made real. This is not the heavy-handed interventionism or disdain for markets by socialists or the far left. This is the enabling and investing role of government supported by generations of both centrist Republicans and Democrats.

Nice bit..

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