How The Ponzi Scheme of Trickle-Down Economics Functions, and Why it Threatens the Global Economic System Itself


 

When people who are not generally unintelligent find themselves having been duped, the nagging question that often remains is “why didn’t I see that the scheme was a fraud in the first place?”  To a great degree, of course, such schemes work because those involved want them to be true.  At the same time, there has to be some semblance of credibility that allows wishful thinking to abdicate any proper critique.

That trickle-down economics, or Reaganomics, was a Ponzi scheme has been made sufficiently evident by the result, which has been a massive concentration of wealth in the hands of the wealthiest at everyone else’s expense, including the expense of the overall wealth of the economies that bought into it.  I’m going to assume the general tenor of the scheme as fraudulent rather than spend time demonstrating it, since only those with a massive vested interest and an ability to completely ignore the self-evident result of the scheme can seriously question this characterization of it.

The scheme itself was sold as a viable economic understanding of the general economy.  In fact it was sold as generalizable enough to found global economic policy.  However the assumptions that were the foundation of the scheme dealt with a restricted economy, one that was precisely restricted by removing the key assumption of general economic theory that demonstrates the scheme’s lack of viability in a general economy.

In the most general terms, the basic assumptions of trickle-down economics create two separate variables that comprise investment and spending, related only insofar as both represent part of the available capital of a given economy, which itself is assumed to be invariant in any specific case.  Within a specific restricted economy, it could be the case that these two variables are not related other than as noted, and could be the case that the sum is sufficiently invariant for that assumption itself to hold, hence within the view that the scheme restricts the reader to there is sufficient semblance of viability to suspend accurate critique, given the simultaneous psychological attraction to accepting a scheme that works the way many, particularly the wealthy, wish things in fact did.  As well, as with most restricted economies, the necessary interaction with the general economy causes the description of the restricted economy to be counterintuitively far more complex than the description of the general economy.  As with most Ponzi schemes, an invalid increase in the purported complexity of the situation is part of what makes the bogus nature of the scheme less obvious.  A corollary of this that goes beyond Ponzi schemes is that in terms of investigating fraud in general, the most basic precept of forensic accountants is to ignore the details initially and focus on the most general thinking of the given economy.  This works because any successful fraud has to have a noticeable net effect on the most general description of events, and since this general description is also the simplest available description, ignoring details that by and large cancel out in this larger view puts the non-cancelling differentials that create a noticeable net effect into better relief.

In a more general thinking of economy, as well as in a thinking of a more general economy, the variables I mentioned are not unrelated.  However quite obviously the relation is not one of identity nor one of pure contrast.  As a result another variable is required to mediate the two.  Although in this specific area of an economic theory there is an increase in complexity, this mediation simplifies the overall theory significantly.

The basic theme of trickle-down economics that remains when you eliminate much of the complexity of the actual description is that since capital devoted to spending part of an invariant total, any increase or decrease directly affects the total of capital devoted to investment, and vice versa.  Capital that is provided to the wealthy, as net investors, sustains an increase in the latter, while capital provided to the poor, as net spenders, sustains a decrease in the latter.  The conclusion is that since poverty is itself sustained by lack of investment, the way to eliminate poverty is to provide as much of the available capital to the wealthy as possible, and it will then trickle-down, and in the process increase, providing a net benefit to the poor as well.

This notion that it will increase is not the basic illusion, but an important secondary illusion in that it accounts for both the increase in the complexity of the description of the specific restricted economy on view, and for the severity of the discrepancy between the projected results and the real results, which makes the net effect so disturbingly clear and thus provides the full potential value of the fraud itself.  That it is an illusion is due to the financial system as a whole being a zero sum game.  Money can only earn money directly, as opposed to being a side effect of investment in new production, insofar as those earnings are simultaneously losses in a related restricted economy.  In the general economy the net gain or loss is always zero unless new value has actually been created somewhere.

The basic illusion concerns two aspects of the description.  Firstly, the variable that refers to investment is ambiguous.  Investment takes two general forms, the preferred and the rate of preference is determined by what is known in general economic theory as the marginal efficiency of capital.  This variable concerns the expected return for investment in the production of wage goods and services, which is the basic meaning of “investment” in general assumed by the scheme.  The other form is investment in rentier property.  That these two forms of investment are separate, and the ways in which they affect the marginal efficiency of capital as well as the ways in which they are affected by it comprise a double feedback loop system that affects the total capital available, results in its omission from the description falsifying the description in a fundamental way.  In the actual description this is not accomplished by simple omission, since that would have been obvious to anyone with a basic understanding of economics, but by creating additional complexities that have a net zero effect in the larger view, but cancel the effect of the differentiation itself in the restricted view.  By not admitting the larger view and maintaining the fiction that the view being described is the larger view, the fraud is maintained as apparently credible.

In a more accurate view of the general economy, the double feedback loop mentioned above works in the following manner:

The marginal efficiency of capital is initially determined by the availability of investment capital and the aggregate demand for wage goods.  This determination occurs as a result of the origin of the return on investment, which the marginal efficiency measures as an average, originating in the aggregate price that wage goods can fetch over costs, which appears in another familiar restricted view, that of an individual wage good producer, as profit margin.

Demand as aggregate demand for produced wage goods, ignoring fluctuations based purely on psychological factors affecting expectation (which should cancel out in the larger view insofar as this larger view is also a longer view), is determined primarily by total wages, less wages devoted to non-optional costs of living that do not involve the purchase of wage goods (or wage services), the most fundamental of these being cost of housing as rent and percentage of wages removed up front by taxation on wage earners.  Rent in this context includes both direct rent paid by those that do not ostensibly own their housing and the percentage of mortgage payments that go to interest and not the capital value of the property.

The existence of an aggregate demand for wage goods that can sustain any investment in new production whatsoever, therefore, is itself predicated on the existence of disposable income, income that can be utilized for the consumption of wage goods and wage services, among wage earners themselves, since by and large (as is assumed by trickle-down economics itself), the wealthy do not utilize a significant percentage of disposable income on wage goods or wage services, instead the income of the wealthy, over and above their costs, is primarily directed towards investment of some sort.

We thus find the double feedback loop.  The first loop arises from the determination of total wages by initial wages plus new wages resulting from investment in increased production, and the determination of the rate of investment in increased production being determined by total wages after subtracting rentier type costs of living.  The second loop, which simultaneously interacts with the first, is that rentier costs are determined primarily by market value of property, which is itself determined by the negation of the propensity to invest in increased production and the total available investment capital, since any capital not invested in increased production of wage goods or wage services must be invested somewhere in order to retain any value.

The result of this positive double feedback loop, if trickle-down economic policy is employed, is that the increase in initial capital to the wealthy (via tax breaks, etc.) does not result in an increase in productive capacity unless there is an initial demand significantly in excess of current productive capacity.  For this initial demand to exist there must be a lack of productive capacity relative to the initial amount of disposable wage earnings.  However the other side of providing more initial capital to the wealthy is that less is provided to the poor.  This change in the initial conditions provided by economic policy thus removes the possible conditions under which it could ever work the way the description predicts.  Instead it creates the conditions under which it will inevitably result in a positively reinforcing cycle of increased capital concentration and decreased investment in production of wage goods and serviced as a positive, or self-reinforcing cycle, not a negative, self-restraining one.

The power of the scheme lies in the fact that such positive, self-reinforcing feedback loops, although conceptually as easy to create as negative feedback loops, are rare in actually existing systems.  The reason for this rarity is simply that positive feedback loops inherently destabilize the overall system.  Most failures of economic policy to effect real change are due to the existence of negative feedback loops that both stabilize the system, and negate the effects of specific policy changes.  The power of trickle-down economic policy to effect the fraud it does is a correlate of its power to destabilize the economic system itself by combining an ability to create the conditions under which it will be effective (in the fraudulent sense) and the fact that once such a positive feedback loop is introduced into a system, it is very difficult to negate. The destructiveness of diseases such as cancers and autoimmune disorders arises precisely from the fact that both create positive feedback loops that progressively increase the disease’s own progress.  The usual result is complete systemic breakdown.

This breakdown becomes apparent when at a certain point it becomes both self-reinforcing and self-negating, because it negatively affects the overall availability of capital itself.  It is at this point that it progresses from a quantitative change with only ethical implications to a qualitative change that threatens the system itself.  The simultaneously self-negating aspect reduces the overall value of capital, but rather than leading to a radical policy change it results in increased calls for an increase in the actual policy directives to maintain the increase in wealth concentration.  This increase in pressure to maintain the positive feedback loops by further cuts in spending on social benefits and social investment in order to produce further tax breaks and an increased tendency towards such concentration of capital comes from both the conservative wealthy and the liberal progressives, whose perspective arises in the restricted thinking of economy that bases itself primarily on employment and income changes.  A further increase comes from the global nature of the policy.  The aspect of the policy that lowers total wages (which include public benefits to those whose income is utilized by a greater net spending) creates a situation where the global economy contracts, yet in order to facilitate competition for an equivalent share of the smaller pie, in each restricted economy it becomes more and more advantageous to reduce costs relative to competing economies, thus accelerating the overall reduction that is causing the basic instability.

The apparently simplistic distinction based on prevalence of income usage assumed here that separates rich and poor into two simple groups is only possible in the most general and longest view. This apparent oversimplification is systemically largely accurate, since “rich” and “poor” in the most general view are properly defined as the propensity to invest and propensity to consume, which are potential aspects of all individuals. For the majority of individuals though, the actual propensity to invest is always zero, since as aggregate income rises to meet the propensity to consume a sufficient quantity of total capital must be siphoned off to provide the accumulation potential of capital necessary for the system itself to continue, aggregate wage income can never rise high enough to create a situation where the majority are net investors.

The double feedback loop also removes any relevance from the more recent differentiation of “good wealthy” versus “bad wealthy”, defined as those that invest versus those that spend on luxury, or in a more sophisticated view, as those that invest in the more risky venture of creating new production of wage goods and services versus those that invest in rentier property, as propounded by certain members of the elite themselves. The aggregate propensity to invest in production of new wage goods and services is dependent on the marginal efficiency of capital alone, not on individual investor preferences, since these preferences and the resulting behavior are determined by it.  Were this not the case the general psychology of the wealthy, which is inherently risk-averse, would prevent capitalism itself from ever arising, since rentier property would be preferred to such a degree that sufficient capital investment in production to create the system itself would never occur.  It is precisely this latter situation that accounts for capitalism arising spontaneously being a rare event, historically speaking.  As far as can be ascertained, capitalism has spontaneously arisen only once in human history.  The prevalence of capitalism as a global phenomenon today is the result of the attraction of the initially exponential economic growth that capitalism allows for, combined with the falling off of this initial growth into cyclical growth and decline and eventual full decline, which can only be prevented by the expansion of the system itself.

That the breakdown itself is as evident as it is demonstrated in that at least the tinfoil set of the right wing has recognized it, even though it is radically damaging to their own agenda.  However, as ideological they can only ascribe the destabilization to antagonistic ideology.  Since there is no anti-capitalist economic power of any real relevance today, the destabilization is attributed to specifically anti-U.S. political powers, usually posited as Russia and China.  That such powers might see political advantage in further destabilization, though, is not a believable proposition, since any further destabilization threatens the global economic system itself, and such a breakdown can only damage the ability of anyone in power, under any pretenses whatsoever, from retaining that power.  That they might act in ways that further destabilize the system makes their actions equivalent in both intent and effect to those of allies of the U.S.  The intent is to stabilize the local, in this case national, restricted economy in the face of a global destabilization. The effect, though, increases the global destabilization itself.

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