The Economy - Part II

Supply side economics presumably originated in the University of Chicago School of Economics and largely with Milton Friedman. [Note: Interestingly, the University of Chicago was founded by John D. Rockfeller].

Until this event, American economics (and, more generally, western democracy economics) had been largely dominated by followers of John Maynard Keynes since the Administrations of FDR.

Without going into details (about which I admittedily have little in depth knowledge), and to contrast Keynes with Friedman; Keynes argued for more intervention in the economy by government, particularly in times of crisis. One of the reasons behind this was that government, theoritically, is able to act faster and more precisely direct expeditures than a free market. Keynes was certainly in favor of free markets and capitalist of high order; it was said that he became personally wealthy by playing the London Stock Market while having breakfast in bed.

To finance government expeditures, Keynes called for high taxes and the government re-direction of the economy...while this was not "socialism" per se, it was much closer to socialism than the philosophies advocated by Friedman. Friedman argued the opposite; that the strongest economies are built on as free markets as possible, because such markets were based - in democratic societies - on the free choices of its citizens. This called for low taxation, small government, and as little government regulation as possible. In a phrase: the market is King and all wise.

Practically, Friedman's theories evolved into Reaganeconmics; the theory that by keeping taxation low, people would have more disposable income to reinvest in the economy, whether in their own bsinesses or through the financial makets. These investments would create new capital for new industries and general economic growth. As the economy grew, so would the demand for additional labor. The competition for the additional labor would, in turn, drive up the cost of labor, increasing wages and enriching the total economy.

John Kennedy expressed the theory with: "In a rising tide, all boats are lifted." And, Kennedy cut taxes resulting in economic growth. Reagan did the same - although it should also be noted that the overall federal deficit increased under each of them; modestly under JFK and historically, under Reagan.

Despite fundamental changes in the national economy and the evolution of that economy into a global economy, Republicans (and a few Democrats) have held onto the Friedman theories.

Neither Keynes or Friedman are "right" or "wrong" and each has to be judged within the context of times in which their theories have been in vogue. Each represents a particular philosophical view; each may be "true" for specific conditions. I would contend that various historic changes in global economics has, in recent years, created national conditions within the global context that obsolete much of Friedman's thinking and, as a result, are now driving us back to Keynesian economics. The best recent example of this is the recent $700B+ government bailout of the financial services industry. In other words, there are times when it is advantageous to follow Friedman's theories and times in which we must follow Keynesian theories, in order to return to the stability needed for Friedman.

Underlying the various factors which are undermining supply side economics is what I would define as three fundamental economic truths: The first is that no one invests capital in a project/product of any sort wherein the value of that project/product is less than its cost. This would be "irrational" and all of our economic edifices rest on the proposition of rationality.

The second "truth" is a collary of the first: Capital investment - whether by government or individuals - is made in order to obtain a gain of somesort. In the case of an indivdual, this may be simply money. In the case of a small businessman it may mean additional means of production (people or machines) in order to increase the size of the business to, ultimately make more money. At the government level, it may social programs such as social security or medicare, which fullfill a recognized societal need. It may be unemployment insurance, which promotes stability. It may be better education, better health care, subsidies for new industries, better roads, national defense, etc., etc.

The point is that, in my opinion, no reasonable, "rational," person would disagree with the proposition that some type of division of wealth must be made between the realms of the individual and government for the future prosperity of both the individual and the society as a whole.

The third "truth" is the real kicker and one largely ignored in recent years, particularily under the Bush Administration (and in certain areas, under the Clinton Administration as well), namely: commitments must equal resources and resources must equal commitments.

In the next post, I will try and show how the violation of these three "rules" has led us both individually and collectively to the verge of economic collapse.