Neither Demand-Side, nor Supply-Side

Some people assume, incorrectly, that I am a "supply-side" believer. I am not. I'm neither demand-side (Keynesian) nor supply-side (Chicago School) in my general beliefs about economics. Ah, and in there we find a problem with economics: beliefs are part of the complexity. The Austrian School of economics is more laissez-faire. While I find the supply-side arguments less troubling than traditional Keynesian models, I would rather embrace the free-market as much as possible. More Adam Smith than Friedman, and certainly more Hayek than Laffer.

Economist Roger Garrison has said there is a word for politicians embracing Austrian Economics: losers.

Keynesian models are demand-based, with the belief that government is the ultimate creator of demand. This is nice and simple to sell to voters, because Keynesian economics offers a solution to downturns: the government will bail us out, somehow. Most voters, not being in the entrepreneurial community or investment class, do resent the capitalists and innovators. (Of course, Adam Smith and the Austrian School both support limits on reckless and dishonest capitalists — a good reason to actually read Smith and Hayek.)

The Chicago School represented by supply-based economics appeals to the investors, the entrepreneurs, and those aspiring to those groups. Again, the political version is simple to sell to some voters and campaign contributors. We'll lower taxes, reduce regulations, and encourage the creation of new products. Investment (supply) is key to the economy in this model. It is slightly better than Keynesian theories — but I still find that many supply-side adherents have as much faith in policy as their colleagues.

In the end, both Keynesians and Chicago adherents believe that governments and central banks should be used for the same final ends: creating and distributing wealth. Trickle-down or redistribution, both assume a great deal.

Hayek and other Austrian economists are not easy to explain. The simple calculations of Keynes' "General Theory" or even the "Laffer Curve" can be taught in Econ 101. Macro economics starting with Keynes makes sense.

Keynes focuses on the simple relationship: demand (private or government) = more production = more labor (lower unemployment). Increase demand, employ more people or pay the workers more.

Chicago theory assumes something as simple: lower overhead (taxes, wages, regulations) = more investment = new products and services (supply)

Hayek is complex. (http://www.auburn.edu/~garriro/aenlse.pdf) Hayek built on Keynes. They were friends and colleagues, especially during World War II. Hayek extended Keynes by adding essential variables and exploring variables that Keynes ignored. By the time you fully examine Hayek, you end up with complex equations that reveal how unpredictable a real economy is.

In an upcoming post, I will demonstrate that although Keynes and the Chicago School might seem "simple" to explain, but they are not simplistic. I don't want people to assume "simple" on the surface for introductory purposes means Keynes' complete "General Theory" and other works are simplistic. They are not. But, gravity is also complex… and easy to explain on the surface.

Economics is messy. It's easy to have faith in simple equations, but I don't trust simple answers.

No wonder I tend to vote for losers.

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