The Great Economists Were Supply-Siders
April 18, 2001
Supply-side economics is solidly grounded in the work of the great economists, Bruce Bartlett reminds us, and that has been a key reason for its success.
Adam Smith was the first supply-sider. His "Wealth of Nations" focuses on how to increase the supply of goods and services because that is the source of wealth and prosperity. Smith also understood that by reducing the rate of return on productive economic activity, high taxes impoverish society and even reduce government revenue.
The critical insight of Smith's French disciple, Jean-Baptiste Say, was the role of the entrepreneur, who, by spying a profit-making opportunity and undertaking to make it happen, makes the economy run.
Say also promulgated his famous law of markets (Say's Law), which economist Mark Skousen restates as, "Production is the cause of consumption, or in other words, increased output leads to higher consumer spending."
Thus Say's Law places production -- i.e., supply -- at the very center of the economic process.
However, in the view of John Maynard Keynes, supply takes care of itself as long as the government ensures there is sufficient demand for goods and services by running budget deficits and an easy monetary policy. In short, producers produce because people spend. Keynesian economics was eventually discredited by the high inflation and slow growth of the 1970s -- stagflation.
However, the tax rebate Congress may enact is almost classic Keynesian policy -- send out checks to everyone, hope they spend it, and trust that this will raise growth.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, April 18, 2001.
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