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Economics
Demand and Supply
There are two types of economists — make that two types of people — in the world.
There are two types of economists—make that two types of people—in the world: demand-siders and supply-siders. What’s interesting about the two is that they think in vastly different ways about life and human interaction.
This is not a bumper-sticker difference in ideology. Supply-siders do not walk around saying, “Cut taxes and watch prosperity trickle down.” And demand-siders do not defend government spending no matter what. They could say these things, but their differences are much bigger and deeper than this.
Demand-siders tend to be pessimistic, fret about greed, worry about leaving people behind, see everything as win-lose, and worry about running out of resources. They believe government can fix all of these issues. Supply-siders tend to be optimistic, get excited about others’ achievements, have faith that people can succeed, and believe things can always get better. They believe government often impedes success.
Some of these thought patterns have been subtly shaped by the ideas of dead economists and philosophers. But much of the difference in these two types of people derives from human nature. For example, it doesn’t take an intellectual to stir up fear about running out of resources. It’s a normal human worry. It’s another matter, however, when economists and politicians take these ideas and extrapolate them into all kinds of economic theories and government policies.
In fact, the economic policy-maker-in-chief, President Barack Obama, and his economic team are clearly demand-siders. They talk of catastrophe, and running out of energy or clean air. And they claim that the only way to save the U.S. economy is for the government to spend money, because the people who earn it either can’t or won’t. This is a demand-side response, and is famously tied to John Maynard Keynes.
Demand-siders look at the world as if it were one giant treadmill of materialism. No wonder they are often so glum. If people stop spending, if people hold back, then the economy is in trouble. It’s all about buying things, getting things, having things. This is where our nation’s church pastors enter the fray. They often complain about capitalism because it supposedly encourages people to take their eyes off God and keep them on material things. And if you believe in the demand-side view of the world, it’s easy to believe that materialism makes the world go round.
What’s interesting here is that no matter how much people complain about materialism and greed, when the economy gets in trouble, the first thing demand-siders want to do is stimulate demand. And in order to do this, they take resources from one group and increase government spending or turn right around and give that money to someone they think will spend it.
If people are buying fewer houses, the government thinks lowering the prices by forcing banks to lower the amount owed or to lower mortgage rates will boost economic activity. But as Milton Friedman said, “There is no such thing as a free lunch.” If we need government to move in with all guns blazing to artificially lower mortgage rates, then someone will pay. Mortgage holders may pay less today, but the lenders will pay a price in the future.
While demand-siders think that stimulating demand by taking from one group and giving to another group is a wise policy, they paradoxically also have a zero-sum view of the world. They think that when the rich get richer, the poor get poorer, but also think that taxing the rich more makes everyone better off. They don’t believe that when the poor get richer, the rich get poorer.
President Obama’s economic team assumes raising taxes will do nothing to the overall wealth of the land because it’s all one big pot that needs to be stirred. Some of President Obama’s advisers even believe that redistributing wealth will accelerate economic activity because lower-income people spend more of their income. And since spending (demand) makes the world go round, we will all be better off if we spend more in total.
President Obama argues that, “with the private sector so weakened by this recession, the federal government is the only entity left with the resources to jolt our economy back to life.” Unfortunately, the federal government gets those resources from the private sector in the first place. So where is the “jolt” to come from?
Zero-sum thinking does not end with money. It is at the root of the arguments about resource scarcity and renewable energy. What most people don’t realize is that this argument has been around for hundreds of years (if not longer). As far back as 1789, Thomas Malthus fretted that there were too many people in the world and not enough food. In 1979, President Carter told the world that we were running out of oil. This makes sense if you only think about buying things instead of producing things.
Supply-siders do not think this way. In fact, deep down, even though many of them won’t admit it, supply-siders think about things the way our pastors should. After all, pastors tell us that God created human beings in His image. They also tell us that God is a creator. God is not a consumer. So, in reality, our human interaction on an economic level is not about the treadmill of materialism; it’s about the fire of invention, innovation, and creativity.
In the supply-side world, shortages are a call for innovation. Malthus was wrong because he did not account for technological advances in agriculture. Carter was wrong too: the world did not run out of oil when he thought it would. Nor did the lights go out when society ran low on whale blubber. And the most powerful economic force of the past 35 years has been the computer chip, which in essence is made from sand. In other words, human beings have created “something out of nothing.”
Supply-siders get excited about the future and remain mostly optimistic because they believe in human ingenuity. They look for ways to encourage risk-taking, wonder where the next invention will come from, and believe that opportunity is endless. What the Austrian economist Joseph Schumpeter described as “creative destruction” is the process of economic advancement.
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David Mathews | 4.21.09 @ 7:08AM
The Supply Siders are wrong if they believe in wealth creation. There is only wealth redistribution.
The only reason why the last century or so has seemed to exhibit wealth creation is because economists live in the here-and-now and therefore spend no time thinking about the future consequences of economic activities.
The present generation has become wealthy by pillaging the future. The most obvious symbol of this pillaging is the national debt ($11 trillion and counting), resource depletion (all resources are finite), overpopulation (6.5 billion humans and rising), and climate change.
When the bill for all of these activities become due our nation and civilization and species will not survive. The United States of America is already bankrupt and insolvent. It is only a matter of time before the collapse of America occurs.
Our civilization is crumbling away right under our feet. Not only has the world's infrastructure become extremely old there is not enough resources to maintain this infrastructure for much longer. Technological civilization is dying.
The Homo sapiens have enjoyed a hospitable planet for a very long time. The planet is quickly becoming inhospitable to human life. Extinction happens.
That's the price humankind will pay for capitalism. Extinction is forever.
Blunt-Bill| 4.21.09 @ 7:29AM
Dave, baby, you've just rehashed the half=baked, pseudo-intellectual arguments of the demand-siders. If your scenario is correct, I suggest you shortcut your clearly miserable existence to the inevitable conclusion of your rant. Go find a gas oven, turn on the gas, put your head in the oven. Rest in Peace.
Otherwise, put a sock in it.
Patrick Pittsburgh| 4.21.09 @ 7:48AM
David Mathews - although you make a plausible point about the U.S. wealth creation being only a mirage: the false appearance of wealth creation by current borrowing. This is a flawed analysis though as it does not take into account the astounding success of other capitalist countries that do not borrow nearly as heavily: South Korea, Taiwan, Japan, Canada, Australia, ect. Furthermore, the U.S. exhibited this success before borrowing got way out of hand this past year.
David Mathews | 4.21.09 @ 7:52AM
Hello Blunt Bill,
I find it so amusing that delusional and educationally challenged people such as yourself confuse suicide with extinction.
The Republican party has already committed suicide by aligning itself with people such as yourself.
Yet you teabaggers ought to recognize the truth of what I am saying. All this talk of the deficit and threat of the national debt indicate that there is some recognition of limits even among the least educated of the conservatives.
Debt matters only because there are limits. Debt is a threat because America cannot grow its way out of an 11 trillion dollar debt.
America is in danger of collapse because there are limits. America's power is declining because there are limits. America is suffering a depression because it bumped up against a limit.
Reality shall treat the delusional harshly.
David Mathews | 4.21.09 @ 7:56AM
Hello Patrick,
Wealth creation is always a myth and a delusion. It is true for the United States of America and it is also true of South Korea, Taiwan, Japan, Canada, Australia and so forth.
Wealth creation is a myth and a delusion because the laws of physics forbids it. To imagine otherwise is to pretend that an economic perpetual motion machine exist.
The oil that we are burning today isn't available for someone else to burn a hundred years from now. There is no such thing as wealth creation. Never has been, never will be, never ever.
Bram| 4.21.09 @ 8:22AM
I'm a pessimistic supply-sider these days. All this government interference is going to discourage the entrepreneur and destroy wealth. Government is destruction, suppression, and poverty.
Bram| 4.21.09 @ 8:30AM
Of course wealth isn't created. My English peasant and American Indian ancestors all had the same standard of living as current middle-class Americans. East and West Germany, North and South Korea - all the same. Case closed.
TennesseeVolunteer| 4.21.09 @ 9:22AM
When travelling in India in the mid 90's, I asked our very kind hostess why individual Indian women were still carrying rocks from new road making above their heads instead of using some of the modern road making equipment that I saw sitting idle at the time. She told me in a knowing way that the machines would be more efficient but India had millions of of people who needed some type of job. (I suppose they had not heard of our outstandingly successful program of welfare!)
She told me that to give these people a job, even if inefficient, gave the people something to do and prevented insurrection. I understood but thought it sad.
I now live in America where my company, with the collaboration of several other outstanding, forward looking, GREEN companies who are working on new ways to build energy efficient structures in a third of the time may not be needed because of the recklessness of our government and our banking system. We'll labor on because we aren't quitters, we have employees with families who depend on us, but we are for sure being failed by the 'demand siders' who don't get it, don't want to get it and , for sure, don't want us to to do well. They'd rather carry rocks over their head. No, they'd rather let illegal aliens carry rocks over their heads while the demand siders watch Maury and Jerry springer.
Pingback| 4.21.09 @ 9:31AM
news bytes » Blog Archive » malthus links to this page. Here’s an excerpt:
SC Mike| 4.21.09 @ 9:59AM
Because of their ideological aversion to low tax rates, Obama and his demand-siders avoid any discussion of what got the US out of the early 1980s recession: tax-rate cuts. That incentivized folks to invest their own money in wild-ass stuff, fueling the silicon revolution that created the communications, computing, and slick stuff we carry around in our pockets today.
People with money today are not willing to risk investments because punishment in the form of higher tax rates awaits. In fact we’re seeing indications that folks are using available cash to purchase hard assets -- commodities and certain collectibles -- with a view of selling them later tax-free. That does the economy in general little good, so no V, just a big U for this recession.
Fourier| 4.21.09 @ 10:57AM
This was a fine article providing things to think about. Thank you.
Marc Jeric| 4.21.09 @ 11:17AM
That marxist bore Mathews is here again, stinking up this discussion. His reading has been limited to Marx and Malthus of 150 years ago. There is no other economy that the supply-side which invents, invests, markets - all by working and saving first. The boss of the US Patent Office recommended closure of his mandate - "since everything that had to be invented already has been" - some 110 years ago. Go on, Mathews - and drown in your own misery and doom. Free markets, unless killed off by Abu Hussein and his ACORN brownshirts, will prevail, at least here in America, land of the free and home of the brave!
Tim M| 4.21.09 @ 11:27AM
Keynesian economics has one fatal flaw, the interaction of millions of people in a market is too complex to ever be modeled or predicted. The law of unintended consequences will for ever disrupt the best laid plans.
Bill| 4.21.09 @ 12:04PM
Good point Tim. I have always felt this way. The human spirit is creative and always responds to the opportunities and need at hand. We look for ways to make things better and create opportunity for the future. People like Dave Mathews see doom and gloom and put their head in the sand. That being said my wife always has a good laugh at his comments. She thinks he is in need of psychological help.
PhilM| 4.21.09 @ 12:13PM
Mr. Mathews:
It's painfully obvious that you're playing the Devil's advocate here -- no one can say "The Supply Siders are wrong if they believe in wealth creation. There is only wealth redistribution" with a straight face and mean it. It is fun to read all the attacks on your ridiculous statements, but your tired attempts to inject life into trite, misguided philosophies are falling flat. It's so hard to think like Daily Kos, isn't it?
James| 4.21.09 @ 1:09PM
I've long realized that the more damning words to classify people into two camps are---
the TAKERS
and
the MAKERS.
Yes, demand sidersa are essentially legal thieves!
Barney Frank and Chris Dodd should be in prison.
MF| 4.21.09 @ 3:09PM
Won't someone wish David Mathews to the cornfield? I enjoy reading the intelligent comments on this site and the great articles. He makes it far more difficult to enjoy. We all know there is nothing new in economics and that the methods being attempted by this administration will strap us for decades to come yet DM insists he is right. Please put an oversized wool sock in it.
chuck in st paul| 4.21.09 @ 3:54PM
"Wealth creation is a myth and a delusion because the laws of physics forbids it. "
What an inanely stupid statement.
The laws of physics have absolutely nothing to do with "wealth". This is typical libtard misdirection with the goal of seeming to be highly read and educated. "Wealth" is defined in as many ways as there are different cultures. American Indians 'created' wealth when they created Wampum belts. Bill Gates created wealth by abetting the creation of an entire industry based on sand.
This Malthusian world view of "too many people" is also stupid. 96% of the people live on 6% of the land. We pay farmers NOT to plant because we have become so adept at food production. Most of the steel in a modern car is recycled (minimal new inputs required). Etc., etc., etc. Mathus was an idiot and so are his followers.
Derek P| 4.21.09 @ 4:04PM
Chris: "Barney Frank and Chris Dodd should be in prison. " Methinks Ol' Barney would enjoy that way too much......unless you put him in a womens prison.......now there's an idea!
BluntBill| 4.21.09 @ 5:03PM
Dave, baby, I'm not the one confusing anything. I am merely suggesting that your reach your ultimate conclusion a bit sooner by taking a self-induces dirt-nap and spare us your jejune inanities.
I'm with the earlier poster that suggested this site would be much more fun without you. As it is, for the length of time any of your posts appear naked and alone - the site wins the uncoveted award of having the most insipid comments on the web.
BluntBill| 4.21.09 @ 5:05PM
Oops, Dave, baby - I wouldn't want to confuse you - that should read 'taking a self-induced dirt-nap'!
Tim| 4.21.09 @ 5:25PM
Capitalism is so unfair.
I'd like to see Obama endorses a new "fairness" law governing all financial transactions. Under the new fairness law, when U.S. legal tender is exchanged between any two parties, the value of the item exchanged would be required to be "comparable" to the dollars paid for it.
In a free market, fair exchange is automatic. This is because if a holder of dollars feels the price for an item is too high, he simply does not give up his dollars. In stark contrast, our government "services" and taxation are most certainly not components of a free market. Government "services" are distributed along the battle lines of class warfare, while taxes for those services are collected at the point of a gun, also in such a manner as to make different classes of citizens, and treat them differently according to their class membership.
If Obama could ensure I got nearly $1 of value for each $1 I paid in taxes, he would have a re-distribution plan I could support. As it is, however, by law, someone else is getting the value of 99% of my tax dollars, and Obama only wants to increase that ratio for me.
I am in the class of citizens who must pay for government services. It is apparently some other class who gets to enjoy those services, because they are mostly refused to me and my family.
So I'd be all for Obama making the capitalist system more fair, if that were possible. The free market, however, is already fair, as described. It's the forced market of distribution of government services and taxation for those services which is patently unfair. Unfortunately, Obama's goal is to not to decrease that unfairness, but to increase and entrench it, by further differentiating the way government treats one class of citizen versus another.
I am in that class of citizen who is required to pay more than 50 times the tax paid by the average citizen. The government does not provide my income to me, nor anything else of comparable value. I earn all my income by my own blood, sweat, and tears, and for me the government only takes, while distributing nearly all my contributions to someone else. I resent it, and am a case in point of an investor and citizen who is desperate to find a more capitalist-friendly, FAIR place to put my money and loyalty. I resent Obama's socialist personality cult turning our land of opportunity into a welfare state, in which those who produce wealth are enslaved to those who re-distribute and consume it.
Hkidd| 2.23.10 @ 10:44AM
Amen.
Pingback| 4.22.09 @ 12:37AM
Demand and Supply links to this page. Here’s an excerpt:
Katt| 4.22.09 @ 2:28PM
Wow. This was a very strong article. I'm a high schooler and I'm going to cite this for my english project. This was the best article I've read , very informational. Thank you Brian Wesbury!!
Brian| 4.29.09 @ 10:13AM
Tim: Thanks for the lucid complaint against the socialistic tunnel into which the US is headed by "turning our land of opportunity into a welfare state".
EdK | 5.4.09 @ 3:28PM
Great article. This really nails everything we are observing now.
Question for Dave M - If wealth creation is a myth, exactly how much wealth is there?
PS - You physics example is inane, wealth and matter are not the same thing. Wealth comes from using the finite resources in an infinitely new number of ways. In 1850, oil was a problem for farmers to deal with.