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Trickle-down theory suggests that improving conditions for the richest members of the economy will stimulate production and benefit the poorest. However, critics argue that it widens the wealth gap and only enriches the rich. It is based on the laws of supply and demand and is contrary to the theory that lack of demand is the problem.
Trickle-down theory is an economic concept steeped in the belief that the economy as a whole will become stronger if conditions improve for the richest members of the economy. According to the theory, these wealthy individuals will be stimulated to produce more as a whole, a situation that would also benefit the poorest. This theory became popular in the United States in the 1980s as the driving force behind President Ronald Reagan’s economic policies. Critics of the theory believe that it only widens the wealth gap between rich and poor.
When a nation’s economy is suffering, there are many contrasting theories about how to recover that economy from the crisis. The drip theory is somewhat controversial because of its counterintuitive nature. Rather than trying to directly increase the fortunes of the poor, the theory postulates that any direct economic stimulus must benefit the rich. Their good fortune, according to the theory, would filter through to the rest of the economy, or, in other words, trickle down to help the poor.
Proponents of trickle down theory believe that by increasing the fortunes of the richest members of the economy, these people will be inspired to pour that extra wealth into the economy. This stimulation is achieved with tax breaks for the wealthy or by providing incentives to encourage entrepreneurship. When this occurs, according to the trickle down theory, these wealthy individuals can then pass that wealth indirectly down to the lower rungs of society. For example, a company may increase its operations and need to hire more, or it may produce more, allowing for lower prices.
Much of trickle-down theory is based on the laws of supply and demand. It follows the work of certain economists who believe that a stagnant economy can be boosted by increasing the supply side. The theory goes that people are still willing to work in a downturn, which means they are trying to make money and therefore still have a demand. So increasing supply would give these struggling workers a chance to meet these demands.
This theory is contrary to the one that states that lack of demand is really the problem of an economy. Critics of the trickle down theory do not believe that helping the rich is a way to help the poor. They believe this only enriches the rich because they can simply keep the extra wealth instead of sending it back into the economy. Worse still, according to critics, the wealth remains within wealthy families by inheritance, thus perpetuating the wealth disparity in future generations.
Asset Smart.
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