In this mutli-part series, Sanat Mohanty discusses why we have to look for alternatives and what kinds of alternatives we should look for. This seventh piece of the series presents the problems with the trickle down theory and the efficiency of free markets.

Part I: What is the point of this discussion?
Part II: Therefore Alternatives: Fundamentalism of our Societies
Part III: Therefore Alternatives: Survival of the Fittest
Part IV: Therefore Alternatives: Capitalism, Communism and Free Markets
Part V: Therefore Alternatives: Questioning Development
Part VI: Therefore Alternatives: Impact of Externalities

Trickle Down Theories
The corporations – and hence the investors and employees – make money but this process of development has also resulted in an increase in life expectancy, health, literacy and standards of living with a corresponding decrease in infant mortality rates. So why is it bad if it is a win-win situation for everyone? Clearly, increased investment and development has meant increased creation of wealth which helps everyone.

In 1973, Ivan Illich wrote (Ivan Illich, “Tools for Conviviality”, 1973, Calder and Boyars, ltd., London.), “a 3 percent increase in the standard of living of the U.S. population costs twenty-five times as much as a similar increase in the living standard of India, despite the greater size and more rapid growth of the Indian population . Significant benefits for the poor demand a reduction in the resources used by the rich, while significant benefits for the rich make murderous demands on the resources of the poor. Yet the rich pretend that by exploiting the poor nations they will become rich enough to create hyperindustrial abundance for all. The rich of the poor countries share this fantasy”. This is the basis for the trickle down theory that has failed.

In effect, the failure of the trickle down theory is owing to the act of hiding externalities in the accounting tables that are concocted in policy meetings. The exploitative basis of development and the necessity of externalities implies that trickle down will never really happen. It is not conceivable that an industrial setup can exist without a reservoir of labor that the industry can depend on. Such a reservoir of labor – where individuals will show up whenever the industry wants it to – can exist only when labor needs to work, when it is in a state of need that it will work. Industry will never allow a situation that threatens the presence of a reservoir of labor. Any process – including trickle down processes – that can provide a decent state of livelihood to a large population will erode the labor reservoir.

Free Markets and Efficiency
But we know that free markets are about greater efficiency. Surely, in times of decreasing resources, you cannot criticize greater efficiency?

Free markets – and the paradigm of development based on this system – are about efficiency. However, this is not about the efficient use of resources. This is efficiency defined as rate of generation of profits. And in fact rapid generation of profits comes with extremely suboptimal use of resources. The Earth has not seen a more wasteful society than ours. We waste food and we waste energy. The amount of waste we have generated per capita per annum is orders of magnitude beyond any other society. In fact, such waste is precisely an externality that we do not account for.

Yes, free markets are about more efficient increase in profits, usually at the cost of optimal use of resources leading to great wastage of resources. They are also at the cost of great violence against humans primarily through laws set up to ensure the presence of large labor forces so that cost of labor stays low as well as through practices that assume that human security and the human sense of well being is expedient in the march towards profits and people’s livelihoods can be taken away whenever necessary.

In The Great Transformation Karl Polanyi describes how pastures in rural England were made off limits to the peasants so that they had not supplementary income to sustain themselves and had to move to cities where they lived in dreadful conditions but constantly provided cheap labor to mills. Similarly, the breakdown of rural livelihood opportunities has led to the creation of slums in cities which provide the essential labor that sustains any city. Cities would break down in the absence of such a constant labor force.