An anti police brutality march in Manhattan ends in flames. Credit: Braulio Jatar/SOPA Images/LightRocket/

June 8, 2020   8 mins

Nick Hanauer is a wealthy man. He was the first non-family investor in Amazon. Among the many businesses he founded or co-founded was one that was sold to Microsoft for billions of dollars. He describes himself as an “unapologetic capitalist”, but sees something rotten in the state of capitalism.

In 2014, he made waves with a pointed warning to his “fellow zillionaires”:

“If we don’t do something to fix the glaring inequities in this economy, the pitchforks are going to come for us. No society can sustain this kind of rising inequality. In fact, there is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out. You show me a highly unequal society, and I will show you a police state. Or an uprising. There are no counterexamples. None. It’s not if, it’s when.”

Given recent events, one could be forgiven for thinking that “when” is now. Six years ago Hanuaer wrote:

“Revolutions, like bankruptcies, come gradually, and then suddenly. One day, somebody sets himself on fire, then thousands of people are in the streets, and before you know it, the country is burning.”

America is burning. The spark wasn’t somebody setting themselves on fire (a reference to the start of the Arab Spring), but the death of George Floyd at the hands of the police.

The anger unleashed last week was, first and foremost, directed at racism. But as important as the foreground issues are, we can’t ignore the economic issues in the background. Looking back at all the political upheavals of the last decade or more, I doubt that either the radical Left or the populist Right would have attracted as much support if opportunity were more widespread.

Money isn’t everything, of course, but if you have (or reasonably expect to have) a decently-paid job, a home to call your own and savings in the bank, you’re less inclined to burn it all down, whether literally or metaphorically.

If one image from last week captured the interplay of these foreground and background issues, it was a photograph of Jamie Dimon kneeling with staff in a branch of Chase Bank. There he was, the notoriously well-paid CEO of JPMorgan Chase, apparently ‘taking a knee’ in front of a bank vault.

It’s all very well for woke corporations to express their solidarity with oppressed minorities, but what we really want to hear from Dimon and the rest of the business elite is why they’ve been doing so well when so many of their countrymen haven’t. Why have wages stagnated? Why is home ownership in decline? Why is the rent too damn high? Why are we individually, and collectively, so deep in debt? Why have so many families and communities been left behind ?


For Hanauer the answer is that prosperity is being hoarded at the top :

“The divide between the haves and have-nots is getting worse really, really fast. In 1980, the top 1 percent controlled about 8 percent of U.S. national income. The bottom 50 percent shared about 18 percent. Today the top 1 percent share about 20 percent; the bottom 50 percent, just 12 percent.”

In the UK, we’ve also seen the top 1% racing ahead, if not to the same extent as in America.

And, yet, the most remarkable thing is just how little political pressure there is for change. Yes, we’ve seen a surge of radicalism and populism — but most of that energy has gone into fighting culture wars. Attempts by centre-left governments to raise taxes on the rich have been reversed — for instance, the wealth tax in France under François Hollande or the 50% top rate of income tax in the UK under Gordon Brown. Further to the Left, insurgents such as Bernie Sanders and Jeremy Corbyn have been neutralised. As for Right-wing populists, they’ve been kept out of power too. Trump, of course, is the big exception, but he’s no direct threat to the super-wealthy — indeed, he gave them a tax cut. He may go down to defeat this November, but if so, he’ll be replaced by Joe Biden, the ultimate establishment timeserver.

Just about everywhere, governments are plugging their deficits with borrowing, not higher taxation. To keep debt cheap, they resort to quantitative easing (QE) which artificially inflates the value of assets held by the rich.

The position of the wealthy has, therefore, held firm. It survived the banking crisis, the Great Recession and austerity. Whether or not it survives the Covid-crisis remains to be seen. Thus far, in most countries, support has rallied to the governing establishment and populists have struggled to stay relevant. We can be sure there’ll be more public borrowing and more QE. Stock markets are already anticipating the financial sugar-rush and are roaring back after the the Covid-crash in March.

It’s not that the rich won’t make losses. There will be individual bankruptcies. Some corporations will go under, others will be bailed-out. But as a class, their privilege look secure. Riots and culture wars, far from being an existential threat, are more likely to serve as diversions.


Contrast the situation today with that of a hundred years ago. In the early and mid 20th century, there was an almighty push-back against the inequalities of the Gilded Age. In some countries, we saw the revolutions and police states that Hanauer talks about. Elsewhere, democracy prevailed, but with a shift to progressive taxation, the welfare state and reforms to curb corporate power.

So why hasn’t there been anything on the same scale in the 21st century? After decades of neoliberalism, this should have been the Left’s great opportunity to regain the initiative. They failed — and whenever they fail, they cry foul. As they can’t possibly have lost fair-and-square, there must be some kind of cheating going on. It could be Russian interference, the influence of social media algorithms or the eldritch power of a slogan painted on a bus. You see, it’s not enough for the other side to be simply mistaken, they must be conspiratorially deceitful. If the people are voting the wrong way, it’s because they’ve been lied to — indeed caught in a carefully spun web of lies. And this isn’t just about the fake news and propaganda, there are intellectual strands to this web too — bad ideas that lend a veneer of respectability to the low politics.

In respect to the distribution of income and wealth, there’s one such bad idea that comes in for more criticism than any other: ‘trickle-down economics’ — also referred to as ‘trickle-down theory’ or just ‘trickle-down’. Basically, it’s a supposed justification for inequality. The state should help the rich to get richer, because some of the benefit will diffuse to the rest of society. The wealthy trickle-down on us from a great height — and we should be grateful for it.

Except that that, on this definition, almost everyone is a trickle-down theorist. If you see any common good at all in allowing some people to be richer than others, then you’re in the club. From Adam Smith’s invisible hand to John Rawls’ Theory of Justice to Vladimir Lenin’s New Economic Policy — it’s all trickle-down theory.

Clearly, we need a tighter, more technical definition — one that can be ascribed to those who defend the neoliberal status quo. But that’s when you discover that trickle-down theory doesn’t exist.

Do a search on “trickle-down” and you’ll get a long list of speeches, articles, tweets and other arguments against the idea. Politicians like Bernie Sanders, economists like Paul Krugman, business people like Nick Hanauer (see above) — are all vociferous in their condemnation. What you’ll be hard-pressed to find, however, are arguments in favour of it.

That’s odd because there are all sorts of ideas the Left doesn’t like — for instance, monetarism or libertarianism — that free marketeers are happy to defend. But with trickle-down economics there’s nothing there to argue for. It’s a phantom — the cause of much fear and alarm, but lacking substance.

This is what Thomas Sowell, the economist and social theorist, had to say about trickle-down:

“No such theory has been found in even the most voluminous and learned histories of economic theories, including J.A. Schumpeter’s monumental 1,260-page History of Economic Analysis. Yet this non-existent theory has become the object of denunciations from the pages of the New York Times and the Washington Post to the political arena… It is a classic example of arguing against a caricature instead of confronting the argument actually made.”

But might there be a real idea advanced by the Right for which trickle-down is simply the Left’s insult of choice? The most obvious candidate is the proposition that cutting taxes (especially on the rich) can increase tax revenues. That might seem counter-intuitive, but it makes sense. There has to be a point at which a tax rate is so high that it disincentivises whatever activity is being taxed, while incentivising avoidance and evasion. From a revenue raising perspective, the optimum tax rate will therefore be somewhere between 0% and a 100%. If the current tax rate is above the optimum, then cutting it will raise more revenue. This is the principle behind the famous Laffer Curve.

It’s a perfectly reasonable theory — most economists accept it to some extent. To use it to argue for tax cuts isn’t trickle-down economics, it’s just an argument over where the optimum tax rate is (albeit one influenced by ideological biases).


The big problem with the Left’s trickle-down rhetoric is that it misdiagnoses what the Right gets wrong — and it fails to understand what motivates free market ideology.

Trickle-down suggests that the only benefit that most of us get from capitalism are the crumbs falling from the rich man’s table. But why would free marketeers subscribe to such a limited view of what their beloved marketplace can achieve?

With some justification, what they actual believe is that economic liberalism benefits just about everyone directly: both as producers, by setting people free to achieve their full economic potential; and as consumers, by providing the widest possible choice of good and services at competitive prices.

That’s not to say they don’t also celebrate the special contribution made by the most talented individuals — the entrepreneurs, inventors and other pioneers of material progress. But in doing so, and in asserting the right of such individuals to get filthy rich, they argue that the rest of us get much more than crumbs. In fact, thanks to those pioneers, we enjoy lives of plenty beyond the dreams of our pre-industrial ancestors.

So no trickle-down here, but a gushing torrent of wealth flowing in all directions. That’s the real narrative of economic liberalism — and as a summary of the last 200 years of economic history it’s at least partly true.

However, it’s not the last 200 years that most people care about. The politically relevant timeframe stretches back, say, two or three generations. Basically, we’re talking about the neoliberal era — a period in which taxes have been reduced, industry privatised, regulations relaxed and markets globalised.

And yet, over these same decades, growth and productivity have slowed, wages have stagnated and innovation has faltered. Tax revenues have not kept up with spending and public and private sector debt has grown. Oh, and the global financial system would have collapsed without taxpayer bailouts.

Just as the statist Left struggles to explain the last 20 years of political failure, the freemarket Right struggles to explain the last 20 years of economic failure. The best they can do is point to global progress against poverty, sickness, illiteracy etc. These things are to be welcomed, of course, but ‘the world is getting better’ is not the slam-dunk argument that the neoliberals think it is. Not when most of the progress is being made by implementing the breakthroughs of an earlier era (vaccines, running water, electricity etc) — and not when the countries making the progress (especially China) are openly authoritarian.


And yet as the liberal West loses ground, the rich are getting richer — taking the lion’s share of our reduced rates of economic growth. The problem with free marketeers is not that they defend this state of affairs, but that they have no convincing explanation for it. Some of them might argue that we need even more tax cuts, deregulation, free trade etc — but who wants to listen that broken record?

Nick Hanuaer argues that economic inequality is itself the cause of slower growth. That’s because the rich spend a smaller proportion of their money than do people on ordinary incomes. Therefore if the rich take a greater slice of the pie, the economy is deprived of consumer demand and slows down.

That is why he wants to replace “idiotic trickle-down policies” with what he calls “middle-out” economics — i.e. measures taken by both government and business to boost ordinary incomes:

“If workers have more money, businesses have more customers. Which makes middle-class consumers, not rich businesspeople like us, the true job creators. Which means a thriving middle class is the source of American prosperity, not a consequence of it. The middle class creates us rich people, not the other way around.”

But if that’s the whole story then how have the rich got richer at a time when the middle has evidently not prospered?

The answer is that they have found other ways of enriching themselves. Instead of competing to provide better jobs, goods and services to the rest of us, they game the system to their advantage alone. Property speculation, asset stripping, tax avoidance, share buy-backs, taxpayer-subsidised low wage business models — there are many ways in which the rich can financially engineer and lobby their way to further riches without creating value. Indeed, they’re all about extracting value from what remains of the productive economy.

What’s killing capitalism isn’t trickle-down theory, but the trickle-up practices of the rentier class.

Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.