On the Sustainability of Trickle-Up Economics and Why This Should Matter for Corporate America by Alexandru Zanca W'21

In Imperialism: A Study, published in 1902, the British social scientist John Atkinson Hobson critically analyzes the imperialist economics of his homeland at that time. He describes a fraught, inequality-inducing system that stunts economic growth, and calls for fiscal reform to remedy the situation. Governments and businesses alike recognize the persistence of such patterns to our days. Among the many solutions being discussed in the policy arena, universal basic income, or UBI, is probably one of the most controversial and misunderstood. Given the amount of public focus being invested into the idea, with trials running all around the globe, from Canada and Finland to Kenya and India, as well as some strong vocal support from the leaders of Silicon Valley themselves, UBI’s legitimacy cannot be denied.

To be more specific about Hobson’s study, he starts by investigating the effects of technological disruption on market forces. Following the industrial revolution, a strong and efficient manufacturing sector emerged in Great Britain, with great potential for high profits. But increased reliance on capital to the detriment of labor meant that wages were kept low and most economic gains went to rich machine owners. These wealthy individuals could then choose among two main possible uses for their surplus income. On the one hand, they could spend on goods and services, especially luxury ones. However, there were only so many jewelries and fine paintings one could acquire. On the other hand, they could invest in even more technological development, but this ceased being an attractive strategy soon enough too. Because average consumers were not becoming wealthier at the same pace that productivity could advance, opportunities for profitable investment were scarce. All in all, the result was that resources got stuck at the top and the economy would be on the verge of stalling.

While our economy does not rely on cotton-processing and steel-making as its main sectors anymore, many of Hobson’s observations are surprisingly still relevant. With the advent of robots and machine learning, we are probably witnessing faster technological change than ever before. In fact, despite political discourse unreasonably focusing on Chinese imports as the cause of lost domestic manufacturing jobs, the truth is that 85% of these losses between 2000 and 2010 have been due to technology, not trade. Additionally, real wage growth has stopped keeping up with productivity since the 1970’s. Persistently low interest rates are also consistent with Hobson’s model. In this context, most economic gains from development are being funneled to the top 1% of wage earners and income inequality in the US is soaring. This is bad news not just for low- and middle-class workers, but for everyone, because when a nation’s output relies almost 70% on consumption, growth depends on the average consumer holding strong purchasing power.

In Hobson’s times, industrialists found an easy way out by lobbying the government to exert military power upon foreign markets and open them up for exploitation. In today’s more robust and hopefully also more ethical global economy, that can no longer happen. However, Hobson comes to the rescue with a different prescription: higher taxes and higher wages. In other words, he is essentially suggesting that income redistribution could get the cogs of the economy moving smoothly again. The mechanics are fairly simple: the government takes some of the money sitting idle in the coffers of the wealthiest individuals and spreads it out to consumers who will in turn spend more and foster more economic activity at all levels.

Everyone has to gain from a well-functioning, dynamic economy. Unfortunately, current bureaucratic welfare systems are doing too little to serve this purpose. The administrative costs implied are disproportionate and the schemes are poorly designed, locking individuals in place and discouraging work through skewed incentives. Corporations are becoming increasingly aware of the importance of downsizing economic inequality, if they are to maintain healthy customer bases that afford their products and services. That is why the likes of Elon Musk and Mark Zuckerberg have been voicing the need for what may very well be the apogee of income redistribution: UBI.

As a policy solution, UBI aims to replace cumbersome means-tested welfare and to put an end to financial insecurity once and for all. Ray Kurzweil, chief futurist at Google and an ardent UBI proponent, defines the policy measure as “a form of security for a society’s citizens in which all residents of a country regularly and unconditionally receive a sum of money, either from a government or public institution, in addition to any income received from elsewhere”. Besides getting money flowing through the economy again, there are other interesting effects of such a transfer. Maybe one of the most wasted resources of our world is the creativity left dormant in the minds of those among us who cannot afford to get the right training or start a business. Functioning as a safety net, UBI would decrease the opportunity costs of education and the risks of entrepreneurship, leading to a more productive society. Similarly, UBI could also reduce job-lock and make labor market movements more efficient. Some pundits even argue that a $1000 per month UBI for every American adult could raise the GDP by 12.56% in 8 years’ time. The main counterarguments to UBI are that it would be difficult to finance and that it could negatively impact employment levels.  However, studies conducted on the Alaska Permanent Fund Dividend proved the unemployment scare to be unfounded. The right way to finance UBI remains the biggest unanswered question on the topic, but it ultimately boils down to personal and ideological preference.

In her 1932 essay titled Economics is a Serious Subject, Joan Robinson put forward an apologia for how economic tools, although limited and faulty, are the best instruments we have for shaping policy. In Robinson’s spirit of scientific humbleness, I think it is important to acknowledge that even though UBI might look good on paper, no one can guarantee its effects until it is actually implemented. Indeed, if we have learned anything from economic history, it is that theory and practice disagree more often than not. Yet some of the most resounding progressivist successes, like the New Deal, have truly been amalgams of controversial ideas accumulated over time, waiting to be put into action under the pressure of seemingly unresolvable disasters. Fervent discussions about inequality and redistribution among government institutions, civil society and corporations are indicative of latent issues slowly but steadily developing into crises. Under such circumstances, UBI is just patiently waiting to happen.