It used to be that when the economy of a developing nation reached a certain level of complexity the nation found itself mired in an economic crisis, and the people who lived at the lower end of the food chain were the ones to suffer the most. These people protested their lot and were joined by many throughout the world who blamed the process by which the crisis happened on the International Monetary Fund (IMF) and the World Bank. All these people regarded the two international bodies as being most responsible for the resulting misery, and they demonstrated against them when and where their representatives met.
The demonstrators believed that the IMF and the World Bank forced the governments of the developing nations that borrowed the money to adopt policies favoring the nouveau riche in the poor countries and their associates in the rich countries. They considered the nouveau riche and the old rich to be the modern expression of a new wave of colonialism that seeks to dominate the poor countries economically. But then the rich nations were hit by what looked like a similar sort of crisis in the year 2008, and the process by which this came about seemed to defy logic when viewed through the lens of the colonial theory. And so everyone developed an opinion as to how the crisis of the rich nations began but it was clear that the participants based their conclusions on premises rooted in long held ideologies.
And now that most economies have been affected, everyone has a view as to how they should be jumpstarted and made to run on all cylinders so as to reach a healthy rate of growth once again. But when all is said and done, those views boil down to two major categories. There is the trickle down category which is espoused by those who identify themselves with the political Right, and there is the trickle up category which is espoused by those who identify themselves with the political Left. Here again we see that the opinions are rooted in the same old ideologies.
The trickle down theorists say that when you give incentive to the people at the upper end of the food chain, they set-up the businesses that create the jobs that employ the people at the lower end of the food chain and thus trickle down the benefits of the incentives. By contrast, the trickle up theorists say that when you give financial breaks to those at the lower end of the food chain, you give them the means to spend on the goods and services produced by the enterprises of the upper enders and thus trickle up the benefits of the breaks.
Both groups have convincing examples they can cite and powerful arguments they can field to bolster their respective positions. And when you look closely at what they say, you find that both are correct but only because each group makes a set of assumptions that reflects an economy at a different stage of its cycle. You then realize that what may work under one set of assumptions may not work under the other set.
For example, if you have an economy where ideas for new products and new services abound but there is not enough capacity to produce them even though the public is clamoring for them, it makes no sense to give breaks to the consumers and leave the potential producers starved for funds. A better approach would be to give incentives to those at the upper end of the food chain who constitute the supply side of the equation so that they may upgrade their means of production and hire the people that will produce enough goods and services to fill the orders coming from the demand side. The result will be that the benefits of the incentives will trickle down and lift those at the lower end of the food chain.
On the other hand, if you have an economy that has a great deal of spare capacity and high unemployment, it makes no sense to give incentive to those who would add still more to the capacity to produce while a high percentage of the population has little or no earnings to buy the products and services that may not even be essential at this time. A better approach would be to give the breaks to those who are at the lower end of the food chain so that they may buy what they need and thus reward the producers who deliver value for the money that is paid to them. The result will be that the benefits of the breaks will trickle up and strengthen the deserving hand at the upper end of the food chain.
At first glance these examples seem to stand at the two extremes of some economic spectrum but in reality, they are both mainstream because they reflect the two sides of the same coin. In fact, they represent one and the same economic cycle, and they take place all the time in all sorts of economies. And the reason why they take place at all is because no one has yet repealed the economic cycle as we have been reminded by events over and over again.
But what stands alone as an extreme case is what we are experiencing these days in the wake of the financial crisis that hit the world a few months ago. What we have now is a situation where everyone is hurting. Those upstairs who own enterprises have a spare capacity but also a debt load that is crushing them while those downstairs have fewer jobs to go to and also a debt load that is crushing them. Clearly then, we have a multi-layered problem that does not lend itself to easy solutions, and the question is this: Can anything be done to alleviate the problem in the short run while making sure that we shall never again be hit with a situation as extreme as this in the long run?
It looks like the short term concerns have been successfully addressed by the intervention of the central banks and the treasuries of the major powers, and only time will tell how durable the measures they took will be. As to the question regarding the long term situation, it requires that we first identify the two pillars upon which stands an economy:
First, there is the physical plants and the infrastructures that go with them. These are everything constructed inside an economic jurisdiction ranging from the factory that stands in an industrial park to the hospital that dominates a commercial district to the apartment building that rises in a residential zone. And the infrastructures that go with these edifices are the streets, bridges, tunnels, water pipes, sewer systems, power and communication grids and so on.
Second, there is the human resources and the infrastructures that go with them. They are the people who have the knowledge, skills and experience to make the physical plants and their infrastructures work, and the people who maintain these constructions on an ongoing basis. To function well the human resources themselves need infrastructures of their own, and these are the teachers, trainers, books, manuals, teaching aids and so on that keep upgrading the human resources with new ideas and new discoveries on an ongoing basis.
Now, in a jurisdiction where no war or natural catastrophe has happened, nothing is destroyed or severely damaged and no one is killed. Thus, the two pillars of the economy remain intact and the slowdown, if and when it occurs, can only be attributed to the natural cycle of the economy. In fact, a slowdown is something that happens periodically in a mild form once every few years, and happens in a more severe form once every few decades. And as noted above, there seems to be nothing we can do to prevent the slowdowns from happening or to repeal the economic cycle that causes them. But what we should be able to do is prevent the slowdowns from becoming so severe as to threaten the entire economic system such as we are experiencing at this time.
The good news is that in the absence of war or a natural catastrophe the problem is one of organization, pure and simple. The bad news is that we have not figured a way to organize the economic system such that it can work harmoniously with our human nature. We tried all sorts of ideologies spanning the political spectrum from the far Left to the far Right, and not one of them has spawned a system that proved to be reliable and effective under all conditions.
And so an interesting question comes to mind at this juncture: Are the forces acting on the developing economies that experience growing pains the same forces that act on the advanced economies as they experience cyclical crises? This question is important because if the answer is yes, we can look forward to formulating one solution that will solve both problems.