Supply-side & trickle-down economics

Economics Economics Questions
1

I tried looking around this site (perhaps not enough) to find commentary on so-called supply side economics and trickle down economics, but didn’t come up with anything substantial. I want to know, what does Austrian economics have to say about them, how are these 3 schools of thought alike, how are they different?

I haven’t really studied this stuff, but I get the impression that supply side economics is about enacting policies that encourage greater supplies of goods and services to be produced because that’s what creates wealth. Is there something wrong with this notion? Some Austrians say that our current economic policies are flawed because government is encouraging demand and consumption, rather than supply and savings, since there is limitless demand, and consumption is not a means to wealth creation, but rather an end. This topic always interested me because I will usually hear “supply side” used pejoratively in the media, but I’ve never heard media pundits actually critique it. So, what’s wrong with it and what’s right with it (I reckon Austrians would have problems with their monetary policy/theory, no)?

Trickle down economics is about enacting policies that benefit the rich, or at least don’t hurt the rich as much, because the rich through their actions create wealth and employment for those below them and those at the very bottom of the income scale. Wealth is seen as vertical, from the up-to-bottom, instead of bottom-up, and instead of seen as horizontal. How do Austrian economists see this? I got the impression from reading introductionary texts that Austrians do see the merit of some trickle down economics to an exent, but think of wealth mostly in horizontal terms. Aren’t mutlinational corporations proof of trickle down economics, as they are largely helping the 3rd world? Is the argument that there are better ways to help poor[er] people?

Most central planner leftists denounce trickle down economics, yet they don’t realize that even they support it, as Roderick Long humorously points out:

“Here and elsewhere, the economic policy of laissez-faire is described as “trickle-down” theory. One way to turn the tables on this old canard is to describe the welfare state as based on a “trickle down” theory. Vast amounts of tax revenue are transferred to a gigantic, swollen, wealthy, bureaucratic, inefficient, monolithic state in the naive hope that enough of this revenue will trickle down to the poor and needy.”

2

wealth is individual and subjective. wealth is in the eye of the property owner. if the “supply-siders” really wanted to ecourage wealth creation, they would be for eliminating all government, because government can only discourage wealth creation by stealing wealth from the rightful owners.

3

Yes, wealth is subjective, but is it not logically true that the more individuals have what they want, the wealthier they are (thus encouraging more supply if “wealth” is desired)?

4

I am not entirely sure what supply-side economics consist in, but I think Austrians oppose certain elements of it rather than the general notion it advocates. Mises after all espoused the view that liberal states tend to be the most powerful, because they allow wealth creation to go on (almost) unhindered, and therefore have more to draw upon. His theory of imperialism incorporates this insight.

-Jon

5

I am sure Austrians are both-side economists. :slight_smile:

6

wealth does not have to mean supply. i can consider myself wealthy if i have good friends, have a good spiritual life, etc.

it does not make sense to talk about supply in absense of demand. what matters is that people are allowed to trade whatever they want as long as the trades are voluntary. trade involves supply and demand, not just supply.

7

Supply-side economics does seem to promote the notion that taxes and such don’t have to be high (rather, should be cut) in order for government revenues to increase. By cutting taxes instead of raising taxes, this would supposedly stimulate growth by increase productivity/supply or something so that government can draw upon the growth of the economy. I suppose that’s where the controversy lies, whether tax cuts would actually increase tax revenues and whether it’s not just a ploy to get the “rich” off the hook of higher taxes.

What I’m saying is that, whatever one considers to be wealth, the more they accumulate such wealth, the wealthier they are (by definition). If there is no demand for “wealth,” it then stops being wealth (in my opinion, wealth can only exist if the demand exists, otherwise why call it wealth? Which is why I did not mentioned demand, as it’s implied.) In your example, would you not consider yourself wealthier if you had many good friends as opposed to fewer good friends, or if you can spend more time with those good friends instead of less time (quantity and/or time here being the “supply”)?

8

I don’t see what is controversial about it - when someone gets to keep more of their money on an investment (even if not 100%), will they not be more inclined to invest? Will this not increase taxable wealth on the whole? Regarding wealth, it is defined in economics as the sum of economic goods (which includes services) one has at their disposal.

-Jon

9

That’s what I want to know. Does Austrian theory have anything to say about this, or supply side economics in general? What are the counter arguments (Austrian or otherwise) to it?

Do any of you have anything to say about “trickle-down theory”?

10

I always assumed that there are no differences between Supply Side and Trickle Down Theories. They both depend on lowering taxes and reducing regulatory burdens in principal to free up entrepeneurs to promote increasing wealth so the aggressive government can have more money. To the Supply Sider there is a Laffer curve that has an optimal tax rate that maximises government revenue at the lowest possible tax rate. So the Supply Side folks hope to generate more wealth to pay for the Warfare/Welfare state. The term “Trickle Down” was invented to describe the reduction of taxes that benefit wealtheir folks as they pay more in taxes than poorer ones. Supply Siders for the most part believe in the central bank, the Federal Reserve, and the government money monopoly. This theory contends that the central banking is required to correct for problems with free market capitalism.

The Austrian Theory on the other hand believes in individual rights to private property. It maintains that government has one function to protect private property rights. (Including the right of self ownership) Austrians contend that government is a criminal enterprise based upon theft. It does not believe in the Warfare/Welfare state. Austrians believe that individuals will establish their own currencies and the central bank only distorts the view of the economy by entrepeneurs and causing boom and bust cycles and lower economic growth from bad investments.

11

Are you sure that isn’t a contradiction?

12

Wren

Here’s my input for what it may be worth.

I don’t think “Supply Side” and “Trickle Down” are hard schools of economic though like the Austrian (and arguably, the Monetarist and Keynesian schools).

I understood Supply Side could be used to group people who do not believe in the Keynesian Demand management economics of the Keynesians, the pervasive thinking in the world today; and I think I have heard Supply Side also used in reference to one group of the anti Keynesians, the Monetarists, who believe in the control of the steady growth in the Supply of money.

As for “Trickle Down”, well this is used to counter the attacks from the proponents of one form of welfare or another to the charge of what will happen to poor if the rich are allowed to keep more of their money rather than hand it over in taxes: the answer that this retained wealth will trickle down to the poor as well.

Austrian economics sees individuals taking many iterative to improve their own individual welbeing, based on their own values and time preferences. All voluntary exchanges increase the welbeing of both parties, and so there is not so much of a trickle down as a general and continuous diffusion of wealth. In terms of Supply Side, the Austrians believe that growth in the supply of Savings has to come before Demand; the opposite view to the Keynesians.

Hope this is some help.

With kind regards

Remnant.

13

Laffer curves FTW!

14

Re: trickle-down, I think it was Gene Callahan who said that “Live Simply So Others May Simply Live” makes a better bumper sticker than “Live Complicatedly So Others Can Make A Living Catering To Your Wants.” Point being, all of society benefits when individuals are allowed to keep more of their own money. A great example of this was the legislative defeat of a proposed luxury tax (or it may have been a repeal of an exemption from the luxury tax) on yachts. The legislation’s most vocal opponents were shipwrights and crewmen, not the yacht owners themselves.

15

Supply side economics is simply a different look at Keynesian economics. Whereas Keynesians want demand side solutions to economic growth and inflation, supply siders want supply side solutions. An example of a demand side solution would be higher taxes when there is inflation. A supply side solution to inflation would be lower taxes to stimulate economic growth (so inflation is lowered according to Friedman’s equation).

The Laffer curve is simply an economic model showing the trade offs between higher taxes and economic destruction. Ideally, most supply siders don’t want taxes to be placed perfectly at top of the Laffer curve, but much lower to stimulate more economic growth.