Learning Supply-side Jude Wanniski November 27, 1996

Supply-side Economics No. 1

Memo To: Website students
From: Jude Wanniski
Re: Learning Supply-side

Some weeks ago, I received an e-mail from a Kevin Isbister, who questioned a letter on capitalism I had posted with Wired magazine. I replied and he subsequently admitted he didn't know economics of any kind and asked if I would help him out, one question at a time. I agreed as long as he kept up with the website, read through the archives, got The Way the World Works out of the library and read it a bit at a time, etc. Instead of me deciding what he should know, I left it that he should conduct this Internet University from the Buy Side. Let the questions come, but not too often. I have a business to run. Here is the beginning of this experiment.

Dear Jude:

Thanks again for agreeing to help me gain a better understanding about economics with this informal e-mail tutorial. I've been plowing through the archives of your website - one a day - for a week now, and that has generated a host of questions. However, in keeping with my original plan, I'll start small and keep it limited to just one Q&A at a time ...

I was most intrigued by the article on Mexico's economy and this concept of the floating dollar. I've noticed since that there are several other articles on this theme, and I think I'd better try to digest that before boring you with mundane questions. So, ill shift gears to a comment you made in one of your memos, stating that supply-side economics is "the only flavor of economics that has had predictive power over the last 25 years." Is this because, unlike traditional demand-side theory (which it sounds like we've been using since we first became capitalists), your calculations account for the return to the floating dollar in the U.S.?

Reply To Kevin:

I coined the phrase "supply-side economics" to put a fresh face on classical economic theory, which dominated Western thought from the late 18th century to the Great Depression. Adam Smith and Karl Marx were both "supply-side," in the sense that they pondered questions of wealth creation (production), as opposed to the management of aggregate wealth consumption. Smith and Marx were political economists as well, which gave rise to their disagreement on who should own the means of production, the individual or the collective..

There is something to be said for both, and of course we mix it up even here in this "capitalist" economy. It is only since the 1930s that Western thought has been dominated by "demand-side economics." Does the economic world revolve around the producer of goods, or does it revolve around the consumer of goods? The paradigms are as different as Ptolemaic and Copernican. I submit it is not a chicken and egg problem, because production must precede consumption. The "demand model," as I argued in The Way the World Works, is only useful when politicians need a theory of redistribution. You might say we needed such a theory during the last 60 years because of the Depression, WWII and the Cold War. Now, we need a theory of production, to get us out of the hole we are in, i.e., the declining living standards and the social pathologies that afflict our young people and cities.

Why does supply-side theory have better predictive power? In the same way the Copernican hypothesis made it easier to predict the movement of the planets... Because it was correct. The scientists of the Ptolemaic era had learned how to make fairly accurate predictions with elaborate mathematical formulae. All that work is unnecessary. Supply-side thinking is diverse as much today as it was in the disagreements between Adam Smith and Karl Marx, but at least those few of us who are practitioners of the art are always more successful in our predictions.

These were good questions you posed. My answers, I'm sure, will invite new questions. To back up these exercises you really should locate a copy of my book in your local library, or click here to order one.