Supply-side Economics Lesson No. 2Memo To: Website Students
From: Jude Wanniski
Re: Where is supply-side economics in the scheme of things?
Here is the second inquiry from my Internet student. The first lesson can be found in our Lesson Archive. My one student is Kevin Isbister. You can follow along with him. If you post an interesting question, perhaps we will admit you to the class.
Dear Jude: I must say, I was shocked to read that supply-side economics -- long drilled into my head as a crazy, new invention of the Reagan Administration -- was actually based on what constitutes normal economic thinking. I am even more intrigued) to get my hands on your book and read the theory properly after your explanation that both Karl Marx and Adam Smith embraced the producer in their systems. My gut -- and not my liberal bleeding heart -- tell me that a idea that is flexible enough to be inclusive of both a Scottish capitalist and a German socialist has merit.
Incidentally, I've had a very difficult time tracking down your tome. The local Hampshire library is about what you'd expect for a village of 2100 people, and I couldn't even get it called up in title-author searches through my connections at Amazon and Follett. I did locate a local bookstore that has placed an order, so give me another few weeks before I can really begin an intelligent discussion.
Thus, my question for this week stems from the above. In my past associations with such diverse fields as physics, education, art and even professional sports, there is a noticeable pattern true to all:1) Earlier standards or "accepted" thinking face few challenges to the norm and repudiate those who do;
2) a radical change is accompanied with some noticeable success, prompting a wave of popular support for the "revolutionary" ideas
3) inevitable failures prompt a return to "traditional" thought, sometimes referred to as "neo"-whatever.
4) a widening variety of schools experiment with alternative thinking and ultimately find mutual truths in all approaches.
Assuming this vague assessment of the
evolution of societal thinking is accurate, where would you put economics on
this path? Is your supply-side thinking the spark of that third stage? Or are
we already in stage four, and we can expect a greater variety of approaches
to solving economic problems than just producer- and consumer-oriented
theory?
Dear Kevin: Your question is an excellent one. You should think
of economic "schools" the way you think of archeological periods. They
come in layers. Instead of Jurassic systems within Mesozoic
eras, we have Monetarist systems within Keynesian eras. That
is, Milton Friedman developed monetarism as a reaction to the new Keynesian
demand-side era. Both accept the idea that the consumer is at the center of
their universe. The Marxist system was developed within the [Adam] Smithian
era. Marx does not really disagree with much of what Smith had to say about
economics. His overlay was political. In other words, he could agree
that in a free economic market that the market would be self-correcting. So it
works in the jungle. But when you add a third dimension, a political
dimension, you have civilization. Do you play three-dimensional chess, Kevin?
It is far more difficult than when played in two. Marx saw that unless you
perfected your political system, the law of the jungle would again
take over and destroy civilization. This is why I call my company
"Polyconomics," referring both to "many" (Poly) variations on "political
economic" themes.
Keynesians at one point referred to themselves as
"Neo-classicists," and now we have Keynesians referring to themselves as
"neo-Keynesians." Does this mean they are Neo-neo-classicists? What it
generally means is they can no longer explain why the things they believe are
consistent with the things they know were professed by Keynes. To avoid
logical inconsistency, which leads to gridlock and stagnation, they must move
on to another "system" within the "era." What the supply-siders discovered is
that once you become to "neo-neo," you should go back to square one. Paul
Krugman of MIT is now pushing neo-neo-neo, which is why he seems so ridiculous
to me when he gets into any kind of economic debate — by insisting that his
Ph.D. entitles him to special consideration. He is horrified that I can know
more about economics that he, when I never spent a minute in an economics
classroom, and he burned the midnight oil cramming. I know vastly more than he
because I taught myself to retrace steps, in the direction encouraged by Bob
Mundell and Art Laffer, back to the center of the universe. Krugman is like a
space traveler trying to understand the universe from a point on the solar
system near Pluto. Bye-bye, Paul.
You own four steps of usual dialectic
are in good order. You wish to know where we are at the moment. I rather think
we have ended an era and begun a new one. This is what Frances Fukiyama's "end
of history" was about, although he didn't quite see it in these terms. New
eras come along once in a great while, while varied systems compete within
them. The new era of political economy is forced upon history by virtue of the
fact that the United States is alone in the world at the top of the power
pyramid. This hasn't ever happened before in history. There were always
competing systems even in the Roman era or the British imperium. We now enter
a three-dimensional world of political economy unencumbered by the dark
knights of Black Fascism or Red Communism. At the center is the idea that
all growth is the result of risk taking, but that growth is not all that
matters.
When you get back to square one, with "classical
economics," no neos, thank you, you at least discover the producer of goods.
And there are things that the classical economists agreed upon that still make
sense in the new era, having to do with monetary policy, fiscal policy, tax
policy, regulatory policy. They get more and more complex as the political
world evolves. That's why it is a good thing that we go slow on this, one
thing at a time.