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Demand-Side Dogma / mises.org-Artikel, engl.

verfasst von - ELLI -, 20.01.2003, 15:07

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Demand-Side Dogma
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by D.W. MacKenzie

[Posted January 20, 2003]

[img][/img] Media
elites have been debating the merits of President Bush's proposed economic
stimulus program actively, but not sensibly. That is, the debate itself is
seriously misguided. The title of this program reveals the flawed nature of
this debate. Since we are supposedly in the thralls of an economic slowdown,
we need to stimulate the economy so as to affect its recovery. 

The notion that economies, as a whole, sometimes lack
sufficient drive derives from a faulty set of economic doctrines that focus on
the demand side of the aggregate economy. According to Demand Side economics,
there are times when total spending in the economy will not be enough to
provide employment to all who want to and should be working.

David Ricardo and Thomas Malthus argued over this matter,
with Ricardo arguing correctly that Demand Side economics was wrong. J.B. Say
also proved the irrelevance of Demand Side economics by showing that demand
derives from the supply of goods to markets. Ricardo and Say won this debate,
and this issue was settled for more than a century.

Aside from a few obscure figures, like J.A. Hobson, few
doubted that Ricardo and Say had proven the irrelevance of Demand Side
economics. But, Demand Side economics regained respectability when John
Maynard Keynes refashioned it in his General Theory of Employment, Interest,
and Money. Keynes is responsible for re-popularizing this doctrine.

The current debate over fiscal policy is being argued
largely in Demand Side terms. Columnist Molly Ivins attacks the Bush plan in
terms that make it sound like bad Keynesian economics. 

However, one cannot
question the intent of this policy when examining the statements of the
president himself.

"On the one hand,
we've got to make sure that we bolster consumer demand by both accelerating
the tax cuts that now exist, as well as providing rebates for non-taxpayers,
but who filed …And Congress ought to act as quickly as possible to get
that money into people's hands as quickly as possible to bolster demand."
(Remarks by the President before the National Association of Manufacturers,
October, 2001)

President Bush clearly
has the Demand Side of the economy in mind with his plan. Of course, there are
legitimate reasons for cutting taxes. But, by focusing on the wrong reasons,
we fail to see the importance of cutting taxes, not only during recessions,
but at any time.

There is no real basis
for believing that markets tend towards under-consumption. Human want drives
the economy, and there is never an end to that. As Ludwig von Mises argued,
man acts to deliver himself from present states of uneasiness to more
desirable states of satisfaction. In particular, consumer demand stimulates
economic activity. Keynesian deficient demand arguments hinge upon the absurd
proposition that some savings 'leak' out of the economic system, so that there
is too little investment. 

To Keynes, interest rates
reflect only the dictates of Central Bankers, and capital markets have no
inherent order to them. This makes it easy for Keynesians to advocate their
policies in principle. If capital markets are chaotic, then we should expect
collapses in investment periodically, and should welcome government
intervention. 

Of course, saving is
merely deferred consumption, based on time preference, and investment hinges
upon expected returns. Interest rates are the price that regulates credit
markets and capital formation. So, interest rates do play a coordinating role
in the economy—they coordinate savings and investment, so that savings equal
investment. This fact renders the Keynesian variant of Demand Side Economics
irrelevant.

There are some, like Paul
Krugman, who deride the Austrian alternative to Keynes. However, one need not
accept the Austrian perspective to reject Keynes. Chicago economists, like
Milton Friedman and Robert Lucas shattered the deficient demand myth decades
ago. Now, even most self-described Keynesians reject the spending driven
theory of Keynes in favor of ‘New Keynesian’ theories that rely on
mal-adjustments in wages and prices.

Both sides of the popular
debate are completely out of touch with accepted academic economics. While
mainstream pundits argue over which income earners stimulate demand the most,
economists argue over which price signals—wages in labor markets or interest
rates in credit markets—are to blame for the trade cycle. 

Our problem is a trade
cycle, not recurring slumps due to insufficient spending. The key problem that
we face is in coordinating the supply of goods with the demand for them
through time. Mises and Hayek correctly identified interest rates as being
central to this problem. Of course, when government policies force wages up,
unemployment ensues. The key point is that demand is irrelevant to
unemployment and the trade cycle.

Of course, heavy taxes
can slow economic development. So, there are reasons to link taxes to economic
performance, but there is a more important point that is being left out of
this debate. Taxes are supposed to fund necessary functions of the government.
By arguing over how to stimulate the economy, many overlook the fact that
government spending consists largely of overt transfers that benefit narrow
interests. This issue got more play during the time when campaign finance
reform was in the news. By recognizing the irrelevance of Demand Side
economics, we can refocus our attention to real issues. 

Coercive transfers are
wasteful, inefficient, and inequitable. The Left uses Demand Side Dogma to
instill false legitimacy into these policies. The Right plays along with this
rhetoric all too often. Since most economists now reject Demand Side economics,
we can hope that it will lose its popularity with the general public and the
media. It will no doubt be difficult to do away with the simplistic spend and
grow thinking that pervades popular thought. The notion that prices coordinate
production is subtle and complex, so it is more difficult for people to grasp. 

However, we must correct
these popular fallacies in order to properly address the ills that stem from
intervention by big government. Tax cuts are not a good idea because we
lack sufficient demand at the moment. Tax cuts are a good idea because
tax revenue gets spent very badly.

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D.W. MacKenzie is a
graduate student in economics at George Mason University. Send him MAIL and
see his Mises.org Daily
Articles Archive.

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Demand-Side Dogma / mises.org-Artikel, engl. - - ELLI -, 20.01.2003, 15:07