Supply-side Economics

Supply-side economics is a school of economic thought popularised in the 1970s by the ideas of Robert Mundell, Art Laffer and Jude Wanniski. The term was coined by Wanniski in 1975.

Supply-side economics was principally a response to the Keynesian ideas that had steadily risen to dominance following the Great Depression. Supply-side economics is largely just a return to the ideas of classical economics, in particular the notion that production or supply is the key to economic prosperity and that consumption or demand is merely a secondary consequence. In classical times this idea had been summarised in Say's Law of economics. A production-centred macroeconomic world view was behind the writing of both classical economists Karl Marx and Adam Smith, despite the fact that in modern times the ideas of both these authors are seen as being complete opposites. However, in contrast to the modern Keynesian world view, these authors actually focused on the means of production (as opposed to the effects of demand).

In the United States commentators frequently equate supply-side economics with Reaganomics. The fiscal policies of Ronald Reagan were largely based on supply-side economics while his monetary policies were based on Monetarism. Hence Reaganomics was only partially based on supply-side economics.

Fiscal policy

Supply Siders believe that increased taxation steadily reduces economic trade between economic participants within a nation. Taxes act as a type of trade barrier that causes economic participants to revert to less efficient means of satisfying their needs. As such higher taxation leads to lower economic efficiency. The idea is partially illustrated by the Laffer Curve.

Monetary policy

Supply siders advocate that monetary policy should be based on a price rule. The aim of monetary policy should be to target a specific value of money irrespective of the quantity of money than must be created or withdrawn by the central bank to achieve this target.

Typically Supply Siders view gold as the best unit of account with which to measure the price of fiat money. Hence Supply Siders are in general advocates of a gold standard.

Supply Siders assert that the value of money is purely dictated by the supply and demand for money. In a fiat money system the government has a legislated monopoly on the supply of base money. Hence it has complete control over the value of money. Any decline in the value of money (or appreciation) is hence viewed as the result of errant central bank policy.

By way of contrast Monetarism is typically focused on targeting the quantity of money in circulation rather than directly targeting the value of that money, whilst Keynesians are focused on the concept of aggregate demand and the targeting of interest rates.

Political Implications

Adherents of Supply-side economics generally find themselves in open political conflict with institutions such as the IMF which typically advocates a Keynesian approach to economics, i.e. the IMF typically advocates "high taxes" (referred to by the IMF as austerity) and "inflation" (referred to by the IMF as devaluation).

Supply siders are often critical of economic policy in third world countries. For instance as at 2003 the top tax rate on farm income in Ethiopia was 89% which some supply-siders suggest is amoung the most primary causes of recurring starvation in this fertile country.

Criticism of

When vying for the Republican party presidential nominee for the 1980 election, George H.W. Bush derided Ronald Reagan's policy of supply-side economics as "voodoo economics".

Both Reagonomics and supply-side economics have been described with derision as "trickle down economics". The implication being that it represents a set of policies that merely benefits the rich and that the poor are left with the crumbs.

A more reasonable criticism of supply-side economics embraces the notions implied by the laffer curve whilst suggesting that the economy in question is already operating on the left hand side of the curve. This is not really a criticism of the underlying theory but rather a criticism of the specific implications that some adherents assume in reference to a particular national economy.

External links

• http://www.wanniski.com/showarticle.asp?articleid=2803
• http://www.washtimes.com/commentary/20031108-111533-9600r.htm
• http://www.polyconomics.com/searchbase/12-15-00.html
• http://www.ashbrook.org/events/lecture/2002/reynolds.html

More at: Reaganomics