Where is Supply-side Economics in the Scheme of Things?
Jude Wanniski
December 6, 1996

 

Supply-side Economics Lesson No. 2

Memo 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.