In lieu of an abstract, here is a brief excerpt of the content:

Chapter 25 Supply-Siders versus the Big Corporation A market economy has two sides, a supply side and a demand side. Economists long believed that any imbalance between supply and demand would correct itself. Any rise in supply, for example, would be met by a rise in demand, an idea called Say’s Law, after the early-nineteenth-century French economist Jean-Baptiste Say. According to Say, producers protect themselves against a decline in the value of their products by quickly exchanging them for cash. Then they protect themselves against inflation by getting rid of their cash. That is, they buy someone else’s products, which increases demand. Supply, therefore, can never outstrip demand. Say’s Law was supposed to apply to all commodities , including labor. A rise in the supply of labor would lead to a rise in demand. As with all commodities, the price of labor might fall. But according to Say, there would always be jobs for those willing to work for market wages. The Great Depression of the 1930s posed a considerable challenge to the idea that there would always be work for those who wanted it. The English economist John Maynard Keynes attempted to correct Say by arguing for the idea of “price stickiness.” Sometimes producers may refuse to lower their prices even though it is in their economic interest to get less money rather than none at all. If producers refuse to sell their products, they cannot get money with which to buy other people’s products, so demand does not keep pace with supply. Keynes argued that the classical economists had been wrong; the economy could get stuck in a more or less permanent state of depressed demand. He proposed that the government raise demand through deficit spending, low interest rates, and an expanding money supply. The coincidence of Keynes’s ideas with the actual policies into which the Roosevelt administration 173 was pushed in the 1930s seemed to prove Keynes right. For forty years, the United States followed his advice. The government aimed to prevent or at least reduce unemployment by increasing its spending during business downturns. But in the 1970s, employment fell and prices rose. This “stagflation”— stagnation and inflation—brought critiques of Keynes and a resurgence of supply-side economic theory. Because government attempts to manage the demand side of the economy did not seem to be working, perhaps it was time to stimulate the supply side—that is, try to raise the supply of goods in the hope of provoking a rise in demand. Hence the rise of interest in entrepreneurship from the late 1970s down to the present day. Entrepreneurs add to the supply of goods in the market place at, they hope, a price that yields a profit. According to the supply-siders, a rise in entrepreneurial activity would raise both demand and employment, benefiting rich and poor alike. The way to stimulate entrepreneurship, they said, was to cut taxes. Their focus not just on cutting taxes but on doing so in order to promote growth explains why leading 1970s supply-side thinkers were not initially in Ronald Reagan’s corner. Right-wing social critic George Gilder, Republican congressman Jack Kemp, economics professor Arthur Laffer, and Wall Street Journal editorialist Jude Wanniski of course saw that Reagan was a tax cutter. But according to the supply-siders, he wanted to cut taxes simply because he saw it as the fair thing to do, not because lower taxes would raise supply and promote growth. As supply-siders tell the story, Reagan failed to win the 1976 Republican presidential nomination because he had no broad economic rationale to justify the tax cuts he proposed. And he won the presidency in 1980, they contend, thanks to his conversion to their ideas. That is, between 1976 and 1980 they converted Reagan to a pro-growth candidate who understood Say’s Law and who wanted to cut taxes in order to fuel a virtual cycle of entrepreneurship, rising supply, rising demand, and rising employment.1 The supply-siders provided most of the intellectual excitement in the politics of the late 1970s and early 1980s. For the first time in half a century, the Republicans were not the party of “no.” Rather than running against Democratic ideas, they had a positive program of their own. They stood for entrepreneurship and economic growth. According to E n t r e p r e n e u r s h i p 174 [18...

Share