The Truth About the Economy No One Wants to Admit

Economic growth is rising, profits are booming—yet most people are falling behind. Why neither the Right nor the Left has a real solution.

This is the first part of a short series on why modern economies no longer work for a large part of the population—and what we might be missing.

Today, we can finally state it plainly: trickle-down is nothing but an empty promise. The economy is not functioning well for a large part of the population. The gravity of the situation is underscored by warnings from Nobel laureates such as Angus Deaton. No convincing, widely applicable solution exists. There is nothing to copy, nothing to adopt from someone “wiser,” and no working model elsewhere to utilize.

The problem is that GDP shows almost permanent growth. This provides a compelling reason for the complacency that is regularly served up to the public. A few flaws are found here and there, but the economy as a whole is growing, and that is what matters most. One part of the economy—a smaller segment—is indeed prospering. Banks, mobile operators, retail chains, and the arms industry are highly profitable. Many smaller firms and startups are thriving. The economy also generates high-paying professions: managers, doctors, the IT sector, specialists, among others. Here, everything is fine. If one firm fails, another replaces it.

But what about the other part? Which part of the economy is actually failing to prosper? Can we identify it? The answer seems clear: the part that yields no profit and generates minimal returns. According to recent surveys, 65% of employees in the U.S. live paycheck to paycheck. Even in “model” Singapore, it is 60%. However, a prosperous economy requires demand—demand from wealthy consumers. When market wages keep a large share of consumers at or below the poverty line, the economy simply cannot thrive. Production and services can offer high-quality, innovative products, but if consumers lack the money, the entire effort is futile.

We know which part of the economy is the problem. Solutions? There are many—seemingly. The Right focuses on the individual and production. Reforms, deregulation, innovation, a focus on higher added value, better education, immigrants, the return of experts, support for startups, lower corporate taxes, subsidies... Reforms make it easier for companies to lay off staff. Deregulation relieves companies of obligations. Innovation and experts bring higher profits. Better education offers prepared individuals better prospects in the job market. Immigrants settle for lower wages. Supporting startups might lead some firms to fabulous profits. Lower taxes and subsidies boost corporate bottom lines. This is by no means a fringe opinion; most mainstream economists argue the same. The Draghi report on European competitiveness has the exact same focus: increasing the profits of wealthy companies so they become even wealthier. But which of these measures will raise wages in the non-prospering part of the economy—for the employees? Wages will remain market-driven, just as they are now. In other words, all the aforementioned proposals solve something that doesn’t need solving at all.

And what about the Left? Higher taxes, pressure to raise wages, strengthening unions, UBI (Universal Basic Income). It is often forgotten that we live in an open market economy. If wages and taxes cross a certain threshold—different for every firm—the company will move production to a country with lower wages or taxes. Or it will go bankrupt because it cannot maintain competitive prices against foreign rivals. Hopelessly indebted states can at best debate UBI indefinitely; the funds to implement it certainly won’t be found anytime soon.

What does this mean? To leave half of all employees to continue languishing? It seems so, doesn’t it? Let them strive for education, take risks in business, or work harder. Let them replace those less fortunate employees who lost the competition. After all, it has worked for centuries—and reasonably well. But should the third millennium really look like this? We are already a quarter of a century into it — yet our economic thinking remains firmly stuck in the second, and poverty remains unsolved by the World Bank, the IMF, or EU funds. Should we care about this poor and inconspicuous entity? It should be noted that robotization, automation, and AI are already waiting at the door. How many dollars would you bet that they will truly bring more and better-paid jobs? Isn’t it more likely that this poor and inconspicuous entity will instead begin to grow?

However, there are factors with the potential to wake up interest even in low-paid employees. For example, crime, low tax revenues, or political extremism. It is only a matter of time before bars appear on the windows and high walls with barbed wire surround the homes of the wealthy. Poverty generates crime in a textbook fashion. Low taxes are insufficient to properly fund healthcare or infrastructure. The state budget is filled differently by an income of €4,000 and the VAT and excise taxes of citizens who spend much more. When the populist parties take their seats in parliament, it will be too late for nuanced analysis.

What needs to be done? The foundation is to change our perspective on the economy and understand the phenomena at play. Blind ideology from the Left or Right will not help. Throughout much of history, it was always the duty of the ruler to ensure full granaries. With the arrival of the free market, this duty was somehow forgotten. People were given freedom. Yes, everyone is perfectly free to choose their own feudal lord. Or even to compete against him. And “competition” is exactly the word that best characterizes the current economy. The free market is the greatest competition in the world. A mutual contest between two hundred states (taxes, tariffs, currency devaluation), millions of firms (prices, innovation, lower costs), and billions of employees (qualifications, skills, diligence, sacrifice) who are also consumers. Like any competition, it has a few winners and many losers. The world’s greatest competition also has the most losers—billions of them. And the proverbial 1% of winners.

The priority of succeeding in global competition is a dead end. We must start thinking completely differently. Competition causes another significant phenomenon—the primary cause of economic stagnation: The Klondike Effect — what I call the constant inflow and outflow of money that determines whether regions rise or decay. With the arrival of money and investment, regions prosper; with its departure, they decline. The principle works always and everywhere. The basis of prosperity is to get money into the districts and keep it there. It must be clear to everyone that it is impossible to keep dollars, euros, or pounds in the regions. Counties can produce food, for example, and there is a significant group of customers who would prefer local products. Why doesn’t it work? There is no “glue”—no money. We need new ideas. Entirely new solutions. The kind that are not taught at any university in the world. They simply do not exist—yet. No university in the world teaches how to keep winning. We are witnessing enormous progress in the natural sciences and a massive onset of new technologies. How does economic science respond? It doesn’t.

So, we know which part of the economy isn’t working, why it isn’t working, why known solutions won’t help, and what needs to be done. The task, then, is to find a solution that respects the constraints mentioned above. Beware: it cannot be anything radical. Let the existing economic model continue to serve; after all, no one wants to risk an economic collapse. Does anyone dare to offer a solution? Because one does exist. You say it doesn’t exist? You’re wrong—otherwise, this text would have no purpose.