Does Supply Drive an Economy or Does Demand?
by
David Schlecht
We’ve discussed supply side economics many times on this blog and there are countless websites that compare the two economic models, Keynes vs Friedman. But this time I’m going to add a bit of history to the discussion. After all, if we can’t learn from our mistakes, we’re doomed to repeat them, and repeating them we are.
Supply Side Economics
Probably the best way to describe Supply Side Economics is Voodoo economics. This is the idea that if you give money to the rich, they will hire people and pay a good wage and the heavens will open and the angles will sing and leprechauns will dance. It’s also referred to as trickle-down economics.
In other words, people will run out and buy just because the stores are full.
Keynesian Economics
This is the old model of economics where demand drives the economy. In other words, when people have money they will buy.
Now this is obviously just broad strokes and there is a whole lot more involved in each of these models of economics. You may find yourself interested enough to learn economics and get into the nuts and bolts of these, but this is as technical as I plan to get.
Alright, so here’s the little bit of history I promised you. Neither of these perspectives of economics is new. Since the beginning of economic times, the concept of supply and demand has been the fundamental core of the study of economics.
However, back in the early days of America, the concept of unfettered free trade was the approach the government took and this freed up the companies to be as greedy and they could. This allowed America to become quite wealthy, or at least our wealthy became wealthy.
Of all the leading countries, we were becoming the most wealthy. This seemed to convince many people that if a little free is good, oh my gosh, totally free trade must be the be-all end-all of wealthy. So, in the late 1800s and early 1900s, America decided to pull all the plugs and let the rich get as rich as they wanted.
So by the 1920s we saw the roaring 20s when the wealthy were insane with their greed and wealth. At lease back then, they were smart enough to protect our industries through tariffs.
Then, the big crash.
Following the Great Depression, many economist admitted that the whole idea of completely unregulated greed was bad for America. At this time, Keynes came back to the idea that maybe really, demand drives the economy. This wasn’t the first time economics thought of this, but it was back in vogue.
Then, about 50 years ago, Friedman brought back the greed and supply side economics.
So, fast-forward to today and we’re all the rage back into supply-side economics and unfettered free trade. Of course, we’re also seeing the return of the economics of the Great Depression.
When will we learn from history? When we start exposing the idiots who keep pushing failed economic policies on us. When we eject the same people who got us in the First Republican Great Depression. The Republicans.
Unfettered Free Trade doesn’t work. All it does is impoverish a nation and make a handful of greedy people insanely rich.
Free trade doesn’t work.
Supply Side Economics don’t work. It’s a myth.
Voodoo Economics always brings disaster. Read your history.
Post-Industrial America
Tuesday, September 6th, 2011Post-Industrial America
by
David Schlecht
In a previous post, I expanded on the value-producing aspect of manufacturing. This discussion explains why America needs a manufacturing industry.
But, what happens when the society becomes so wealthy that they no longer need to or are no longer inclined to continue purchasing? They still have the money and want to do something with it, but how many boats do you buy before you get bored buying boats?
So, along comes the service sector to give the buyers something new to buy. I don’t want another boat, I want someone to mow my lawn so I can enjoy the boat I already have. I want to go out to a nice restaurant, I want to see a play, I just have to go see the latest comedy or magic show…
In this case, the service industry is a symbiotic parasite on the society in that it gives back in return for what it takes. It serves a purpose but it also drains valuable resources from the society. When you no longer have a manufacturing industry, there is no longer any symbiosis and the parasitic service industry begins to impoverish the society.
This is, of course, all academic, since America is not anywhere near the point where we no longer need anything. America needs plenty. Have you seen the condition of our roads? Or Bridges? Our Internet? Our cell phone infrastructure? We need plenty of manufactured products.
As long as we’re manufacturing what we need and have a little left over to export, then our society remains strong. When we no longer manufacture, then eventually there will be no one left to buy the services from the service industry.
I suppose we’ve all heard the argument that making hamburgers at the local fastfood shop is adding value to the meat so it’s really manufacturing.
This is an awfully weak argument but we can’t dismiss it out of hand. There is some value, but the value is lost the moment the product is consumed. This stems from the old argument of “guns and butter”. Paying for butter is a short-lived investment, but buying guns gives us the value of the weapon for years to come. This was Reagan’s argument for spending money on Star Wars and not Welfare.
The problem here is that the guns, or bombs will eventually be used and will be gone. In a war, it’s amazing just how fast these inventories can disappear, how fast the wealth can disappear.
America needs to get back to building things that last.
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