Supply-side economics in a nutshell

The entire supply-side complex is philosophically derived from Jean-Baptiste Say’s philosophy:

It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J.B. Say, 1803: p.138-9)

The two critical assumptions:

  1. The value of money is also perishable”
  2. “the only way of getting rid of money is in the purchase of some product or other”

These assumption has often been paraphrased by statements like: “product is paid for by product”.

In the past century, these assumptions have been held true for about 85% of the time.  Supply-side economic theory, as a consequence, has been effective in this sample.

The key observation Keynes made was that they are not true for a minority of the time:  when the businessman suddenly decides that the value of money is not perishable, specifically relative to re-investing it in future production, the supply-side assumptions are incorrect, and policy-making needs to reflect that.

This lack of re-investment is quite clearly the driver of unemployment:


…but you already knew that if you had read Macrofugue on September 20th.

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2 Responses to Supply-side economics in a nutshell

  1. Kyle says:

    I am not going to defend Say or Say’s Law but I will point out the Austrian view that the economy starts with production first and consumption after. It is impossible to consume something that has not been produced. While axiomatic, to me that simple statement points to the difficulty of the Keynesian perspective — i.e. his focus on the drop in business investment and the need for either government stimulus or increased consumption as being the problem/solution. Its like wagging a dog’s tail to get him to walk. I think of Keynes in the same way that Reagan used FDR and other liberal heroes to make his case. Keynes was smart enough to understand the dangers of too much sovereign debt. There are likely great quotes from Keynes to argue against what is being argued in his name. I’m sure you are familiar with the hangover theory so I won’t bother covering the Austrian diagnosis. Anyway, just found your site and think a lot of it is interesting. Surprised by the positive macro data from a couple of posts ago. ThanksKyle

  2. Matt Busigin says:

    It is a mistake to consider the economy “starting” anywhere.Reagan spent a great deal of money with very large deficits, and was effective. Imagine if he had spent less on means of war, and more on future productive enhancements like infrastructure.

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