The Dynamic Trickledown Hypothesis

Mainstream market liberals were generally disdainful of the voodoo economics of the Laffer hypothesis. They nonetheless accepted the central postulate of trickle-down economics, namely, that policies favorable to the wealthy will, in the long run, produce benefits for everyone, compared to the alternative of progressive taxes and redistributive social welfare policies. Rather than rely on the simplistic, and easily refuted, Laffer 6 The Heritage Foundation figures add in some of the first Bush...

Black Scholes and the Rise of Financedriven Capitalism

The Efficient Markets Hypothesis made a big difference to the way economists viewed financial markets. Initially, though, it had much less impact on financial markets themselves. In The Money Game, an entertaining and economically literate description of the stock market scene in the 1960s, Adam Smith (a pseudonym for George Goodman) describes 3 Since the weak form of the Efficient Markets Hypothesis is relatively uncontroversial and mostly unimportant, I will use the term Efficient Markets...

Birth calm after the storms

If only by comparison with the dismal 1970s and 1980s, the 1990s were an era of prosperity for the developed world, and particularly for the United States. The boom of the late 1990s produced improvements in income across the board, after a long period of stagnation for those in the lower half of the income distribution. The boom in the stock market produced even bigger gains for the wealthy. House prices were slower to move, but because they are such a large part of household wealth,...

References

Akerlof, George (1970), The Market for 'Lemons' Qualitative Uncertainty and the Market Mechanism, Quarterly Journal of Economics, 84(3), 488-500. - (2001), Behavioral Macroeconomics and Macroeconomic Behavior, Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2001 Prize Lecture, Aula Magna, Stockholm University. Akerlof, George, and Robert Shiller (2009), Animal Spirits How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism, Princeton Princeton...

Real Business Cycle Theory

The microeconomics-based approach to macroeconomics appealed to large segments of the economics profession, who valued the elegance and apparent precision of microeconomics more than the messy empiricism of macroeconomics. There was, however, an obvious problem. General equilibrium models like those of Walras, Arrow, and Debreu naturally generated a stable, static equilibrium. But the reality that business conditions fluctuate over time could scarcely be denied. So, the problem was posed as one...

The United States since 1970

The experience of the United States during the decades of market liberalism, from the 1970s until the Global Financial Crisis, gives little support for the trickle-down view. The gross domestic product of the United States grew solidly in this period, if not as rapidly as during the Keynes-ian postwar boom. More relevantly to the trickle-down hypothesis, the incomes and wealth of the richest Americans grew spectacularly. Incomes at the fifth percentile of the income distribution doubled and...