Demand-Side Economics

　By John T. Harding

 Supply and demand are inter-related themes in any economy; neither is dominant for long, and each responds in varying ways to any change in the other. The question, then, is which to push first to revive a faltering economy.

"In the short run, politics dictates economics.
In the long run, economics dictates politics" -- Unknown

   This year's presidential election is not only a political contest between Barack Obama and Mitt Romney. It is also a competition between the followers of J.M. Keynes and F.A. Hayek. And while many voters may not have heard of Keynes and Hayek, the ideas of these long-dead economists live on in the policies of the two rival political parties.

   Republican supply-siders are "Field of Dreams" economists: "If you build it, they will come," and its corollary, "If you make it, they will buy." But jobless workers cannot increase their demand, since they have no money for purchases.

   Democrats tend to be demand-siders; encourage consumption and suppliers will respond by increasing production.
   How to accomplish this?
   The Keynesian answer: Government intervention.

   For Keynes, the way to boost a faltering economy is to encourage consumer spending through government-sponsored projects -- "priming the pump" of money by providing jobs, which pay wages, which workers can use to buy stuff.
   This is a "demand side" strategy. Government-sponsored jobs inject money into the economic stream and thereby boosts "demand energy," with increases in supply to follow.
   This strategy worked in the 1930s, helping to bring America out of the Great Depression. A similar strategy was adopted in 2009, with a government stimulus program activated to help bring the economy out of its doldrums. Whether this recent pump-priming was enough remains an open question.
   On the other hand, adherents of Hayek warn that government involvement in the economy puts the nation on "The Road to Serfdom," which was the title of Hayek's best-known book, published in 1945. What's more, the book reflected the widespread fear of Soviet-style communism.
   Keynes did his major work in the early 1930s, and provided a framework used by President Franklin D. Roosevelt to ease the pain of the Great Depression.
   Hayek, in contrast, stressed the virtues of free-market capitalism and the benefits of perfect competition.
   Keynes recognized that market forces do not always work at peak efficiency, and sometimes a government mechanic must intervene to oil the market machine and "prime the pump" to get things moving again.

   Who was right? Both and neither.
   Market drivers can be faster and more efficient than government control, but when the market engine stalls or the drivers go off the track and sit in the stands, government must temporarily take the wheel.
   Perfect competition does not exist in the real world, and at the other extreme, total government control leads to dictatorship and oppression. Moreover, both can be havens of corruption.

   Somewhere in between is a balance, with free enterprise to promote innovation and market efficiency, and government regulation to prevent corruption, abuse, and to ensure product and environmental safety.