Supply Side / Demand Side Economic Theory.

Dear Friends,

It seems to me that there is great confusion about what supply side economics and demand side economics mean. I will try to explain the difference in this blog, why our understanding the difference is important, and how it pertains to the economic times we find ourselves in. Everyone who is involved with the economy of any country should take heed and understand the difference.

The media are full of possible solutions to the lack of jobs and growth in the American economy. They opine how, if only this or that program would just get the US citizen to spend a bit more, then the job situation would get better and the unemployment rate would drop. This is all sophistry, because it is based on demand side economics, an economic model that empowers the Elite but does little to create jobs. Demand side was talked about in the nineteenth century but it was John Maynard Keynes who quantified it.

Demand side is best described in the context of the aggregate demand/aggregate supply model. In this model, if aggregate demand drops below aggregate supply, then the economy dips into recession. But, as long as demand is “kept” higher than supply, the economy grows. This model suggests that if demand is kept high then the economy will grow and jobs will be added.

Supply side is best described with the Schumpeterian model of entrepreneurial based model of economic cycles of expansion and contraction. In this model, the growth cycle is started, when a new entrepreneur invents a new product, process or industry. This starts a cascade of events, new firms must be created to service the entrepreneurs’ new idea, economic efficiency improves, new workers must be trained, and old inefficient firms are destroyed. Initially the economic growth generated is fast but as the entrepreneurs’ idea matures the process slows until it stalls, and the destruction of old inefficient industries cause a recession. The lowered cost of doing business, (due to the recession), enables a new entrepreneur to bring his or her new idea into the marketplace. The process starts anew.

In demand side economic theory, as demand is increased, jobs are not necessarily created. This is due to the fact that there is always some slack in any supply chain. If there was not prices would be high. As demand goes up, firms can ramp up production without hiring new labor, but by adding overtime. If the firm believes that the new increase in demand is a short term phenomenon, due to short term government stimulus, they will shop out excess demand to firms that still have slack.

Supply side is a form of Say’s Law. An example Say’s Law would be, we know as a self evident fact, that there is a demand for a robot, call it Rosy, that is capable of performing all the tasks that a live in maid could, for $4.55 a day in electricity costs, the only holdup is the lack of supply of such a robot. That is the essence of Say’s Law; supply drives demand.

In the supply side model jobs are necessarily created when new firms are created. These new jobs are generally better paid and have better working conditions then the ones that are destroyed. In this way, the employment conditions of the working man and woman have improved, throughout the time capitalism has been in use in the Western World.

Demand side is usually implemented by government deficit spending, ala Keynesian economic theory, (but even Keynes, on his most progressive day, never believed, or propounded, that governments run perpetual deficits). The spending is seen as a way to artificially prop up demand, temporarily, so economic demand can catch up with supply. As we saw with FDR’s deficit spending and with Obama’s deficit spending, it doesn’t lead to more jobs, it leads to fewer jobs, as firms lay off in anticipation of the inevitable ending of the temporary stimulus.

Supply side is implemented by helping people start businesses. Lowering the costs of starting businesses is one of the primary ways recession leads to a fast increase in economic output. As the cost of commercial/industrial real estate become cheaper the entrepreneur has increased access to the means of fulfilling his or her ideas. Government can lower regulation opening new possible business models to the entrepreneur. The fundamental point to make about supply side is that… jobs are NESSESARILLY CREATED, when this model is implemented.

Demand side empowers government to enact oligarchal legislation and practices, (crony capitalism). The Elite are empowered to engage their rapine. Passing laws that redistribute the goods of society, ostensibly to prop up demand, but are nothing but the distribution of the goods of society through political favor. That is what redistribution is; the distribution of the goods of society-through political favor. Does anyone actually think that political favor is the most human hearted or equitable means of distribution? Honestly?

The Schumpeterian model sets up a tension in society however. With this model there is an animosity set up between the now wealthy and the soon to be wealthy. The old money seeks to stop the new money from competing with their established firms. The old money, or the present Elite, don’t want to be supplanted by people who are more virtuous. The workers in the old industries also resent the entrepreneur. They missed out on the new jobs even while there jobs are “creatively destroyed“. So the laid off worker is also part of a voting bloc, that thinks it is in their best interests, (egoists), to use the demand model and eschew the Schumpeterian model. Class warfare is simply a means to inculcate the people to demand side ideology against our own best interests.

The difference is stark and the results are even more dramatic. We have shown the supply side model necessarily creates jobs while the demand side enhances the Elite’s power. Now that you know the difference it is your responsibility to propagate the truth. To your friends, your associates and your peers. Jobs will be created and the economy improved but the Elite may loose some power over us… Oh well at least people will have work.