Supply Side Economics

You may already know the classic Supply and Demand graph...the most famous of all economics graphs, showing the upward sloping supply curve and the downward sloping demand curve. We know that where supply and demand crosses is the price and quantity where goods can be sold on the market efficiently. Suppliers supply x amount of y good at z price, and consumers buy x amount of y good at z price, yada yada, you get the picture.

If it takes two to tango and create economic growth (both supply and demand), why is there both supply side economics and demand side economics?

Well, it’s kind of a chicken-or-the-egg problem. Demand-siders (the trickle-up believers) think the economy is driven by consumer demand, at the bottom of the economic pyramid, i.e. you can’t make consumers buy stuff they don’t want. For instance, way back in the 17th and 18th centuries, the Brits saw China as a huge market to tap into, so they tried to come up with all of this stuff the Chinese people would want to buy. But the Chinese didn’t want any of their stuff. They were only interested in the silver, which they were getting in heaps, since Britain was importing a ton of porcelain, tea, spices, and silks, from China into Europe, depleting themselves of silver. Whoops.

Supply-siders, (the trickle-down believers), believe the economy is driven by producers, who are at the top of the economic pyramid. How will the economy grow if the people with all of the money at the top aren’t investing it into creating and growing businesses? The logic is that the head honchos of the economy (the “job creators,” the entrepreneurs, the investors) have a lot of money, which can be either held onto or invested.

The supply-siders’ theory is that, if taxes are high, then high-income earners are incentivized to sit on their hands, leaving their money to collect dust when it could be doing something more useful. If taxes are low, on the other hand, they’re incentivized to invest that wealth into the economy, which would create more jobs and lead to more spending, boosting economic growth. Money would “trickle down” from high-income earners to low-income earners.

Supply-siders have a similar theory when it comes to regulations. Like higher capital gains and income tax on high-income earners, business regulations are seen by supply-siders to be a disincentive for that group to invest in the economy. Likewise, supply-siders see monetary policy as raining on their parade. Monetary policy is when a central bank tinkers with interest rates and the money supply to try to balance unemployment and inflation. For supply-siders, the central bank is sticking its sticky fingers where they don't belong, into the natural functioning of the market.

The reason we have a central bank tinkering with things is because the norm in macroeconomics today is a bastardized version of Keynesian theory. Keynesians are demand-siders, so when they see the economy going into a slump from consumers having the blues, they think the solution is government intervention, including monetary policy tinkering. Supply-siders, meanwhile, say Keynesians have got it all wrong.

At the end of the day, the market will always be a mix of both supply and demand. We’ll just keep letting that invisible hand, uh...do its thang.