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Capitalism and Trickle-Down Effect

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Capitalism and Trickle-Down Effect

Peter Vigneux


POLI 301

A capitalist state naturally relies on the idea of the trickle-down effect. This is the idea that as long as big business does well in the economy, the monetary benefits transfer to employees and other citizens in the economy.

Capitalism is where the industry in a country is controlled by private (rather than public) interest. Since the rise of neo-liberalism and the fall of Keynesianism and the welfare-state, capitalism and its ideas of laissez faire markets grew rapidly. From the perspective of the common citizen, it would seem as if the only people benefitting from this system would be the people who are already rich. This is where the idea of trickle-down effect comes in; that with less government regulation and taxes on big business, people benefit from employers offering better wages and benefits or goods and services become more affordable. The idea is that by stimulating the economy, the welfare-state in which the government supported the people would transfer to an economy where people were able to support themselves. This also results in less interference from the government in the economy as well as in social policies and citizen’s everyday lives. This results in less taxes and more money in citizens pockets in theory.

Without the idea of trickle-down economics capitalism as we know it would be a difficult sell to the average citizen. The idea of trickle-down economics sells the idea that capitalism is beneficial for everyone, from government to every social class. The rich get the benefit of less taxes and regulations, the poor get better wages and benefits, and the government gains a larger work force and tax base while having less responsibility over the citizens well-being. This also benefits everyone as with a larger tax base and less government responsibility, individual tax contribution should go down.

As far as governance goes, less government responsibility and attention on economic and social policy allows for focus elsewhere. Resources can be better spent on infrastructure such as roads, communication, water and power, international administration and national administration. This also benefits everyone as they get to enjoy better infrastructure and more efficient administration. With big business doing well they hire more people, creating a smaller welfare pool and less drain on government resources. These people now become contributors to the government rather than a burden.

As citizens benefit from trickle-down effect, they now have disposable income and become consumers in the market further driving business. The steady flow of income contributes to the success of business and in theory, further growth in employment and wages. This helps prevent market stagnation and consistent aggregate demand as disposable income encourages consumerism. A consistent level of demand and consumerism is a key factor in preventing recession in a capitalist market as well. The market, in this cyclical nature that is the trickle-down effect, should, in theory, create constant growth where citizens become consumers and create more jobs for other citizens to become consumers as well as opportunities and wages being driven higher by big business due to its success.



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