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While all macroeconomics involves both supply and demand, supply-side economics is a school of macroeconomic thought popularised in the 1970s by the ideas of Robert Mundell, Arthur Laffer and Jude Wanniski. The term was coined by Wanniski in 1975.
In 1978 Wanniski published "The Way the World Works" in which he laid out the central thesis of supply-side economics and detailed the supposed merits of low taxation and a gold standard.
In 1983 economist Victor Canto , a disciple of Arthur Laffer, published The Foundations of Supply-Side Economics. This theory focuses on the effects of marginal tax rates on the incentive to work and save, which affect the growth of the "supply side" or what Keynesians call potential output. While the latter focus on changes in the rate of supply-side growth in the long run, the "new" supply-siders often promised short-term results.
Supply-side economics was principally a response to perceived failings of Keynesian ideas that had steadily risen to dominance following the Great DepressionThe Great Depression was a global economic slump that began in the United States following Black Thursday, the Wall Street panic of October 1929. On October 24, 1929, share prices on Wall Street collapsed catastrophically, setting off a chain of bankruptc. In particular, the point of disagreement was the question of the stagflationStagflation is a term in macroeconomics used to describe a period of characteristic high inflation combined with economic stagnation, unemployment, or economic recession. Stagflation is thought to occur when there is an adverse shock (a sudden increase, s of the 1970s, and the failure of Keynesian policies to produce growth without inflation, and the failure to provide a clear solution for the series of recessions which occurred in the wake of the oil crisis in 1973. As with the crash of 1929, whether particular policies could have avoided the negative outcomes of history is a matter of intense debate.
Specifically, supply-side economics grew out of monetarists' critiques of Keynesian economics, and instead focused on encouraging investment, which they asserted was the basis of classical economicsClassical economics is a school of economic thought whose major developers include William Petty, Adam Smith, David Ricardo, and John Stuart Mill. It is seen by many as the first modern school of economic thought. Some authors, such as John Maynard Keynes. In particular the notion that production or supply is the key to economic prosperity and that consumptionConsumption is the using up of a resource. Discussions of human consumption of resources plays an important role in both economics and environmentalism. In Keynesian economics, "consumption" is short-hand for personal consumption expenditure and is determ or demandA demand is a forceful request. In economics it is a term for the call or need within a market for a particular commodity. It is effective demand when a person's wants or needs are endorsed by the person's ability to pay ( income and/or wealth). When this is merely a secondary consequence. In classical times this idea had been summarised in Say's LawSay's law is an economic principle, formulated by Jean-Baptiste Say, that asserts that there can be no demand without supply. In the economic sense, demand refers to a desire materially expressed in an exchange. Say's Law states that there can be no excha of economics, which had been refuted by Keynes in the 1930s. This led the supply-siders to advocate large reductions in marginal capital gains tax rates in response to inflation, to encourage allocation of assets to investment, which would produce more capital, and therefore more supply. The increased supply would then lower prices because of competition, hence the term "Supply-Side Economics". This policy was generalized to call for lower marginal tax rates in general, especially at higher incomes.
Like many conservative versions of economics, many supply-side advocates claim that they are merely reinstating classical economics. (See Keynesianism for a discussion on Keynes and the classical critiques of his theory) However, to most economists they are practicing Keynesian economics, with the latration of promoting demand side for investment and upper income consumption, that there is nothing to distinguish "Supply Side Economics" from ordinary borrowing to finance present budget deficits.
Supply siders maintain that they offer a production-centred world view, and that this was behind the writing of classical economists such as Adam Smith and Karl Marx. In contrast to the modern Keynesian world view these authors are thought, by supply siders, to focus exclusively on production, as opposed to the effects of demand. Despite both these economists being frequently characterised as polar opposites in economic thinking, Jude Wanniski says that their production centred world view puts them closer together than either is to Keynsian economic thinking. By appealing to Say's Law supply-side economists such as Jude Wanniski seek to return the emphasis of macro-economic analysis to these classical traditions.
Critics of supply-side economics, such as Paul Krugman, quote one-time Reagan aide, David Stockman, to argue that this rhetoric is merely "a trojan horse for upper bracket tax cuts without economic justification." They point out that demand is crucial to both Marx and Smith, and that Keynes formulated demand side ideas because there had been a demand side failure in the late 1920s and early 1930s.
Supply-side supporters broke with Friedman and Lucas in that they argued that cutting tax rates alone would be sufficient to grow GDP, lift tax revenues and balance the budget. Supported by the powerful editorial pages of the Wall Street Journal and the Washington Times, supply-side economics became a force in public policy starting in the early 1980s.
In the United States commentators frequently equate supply-side economics with Reaganomics. The fiscal policies of Ronald Reagan were largely based on supply-side economics. However the monetary policies that prevailed at the time under Federal Reserve chair Paul Volcker were based on standard Keynesian and monetarist theory: he pursued a policy of using high interest rates and low money supply growth to squeeze inflationary expectations out of the economic system. Hence supply side supporters argue that Reaganomics was only partially based on supply-side economics. Nonetheless, Jude Wanniski cited Reagan, along with Jack Kemp, as a great advocate for supply-side economics in politics and to repeatedly praise his leadership.
Supply-side theorists also point to the success of the Kennedy tax-cuts to defend their case (even though they were justified at the time by Keynesian theory). More generally, supply-side rhetoric is often used to justify tax cuts for high income earners and other policies based on trickle-down theory. However an examination of the actual policies proposed and their motivations shows that Kennedy was attempting to end, not exacerbate trade deficits, and his intention was focused on the macro-economic effects of an inflation-employment trade off. (See Kennedy's 1963 speech on the balance of payments deficit and his address proposing the tax cut for his own balancing of supply and demand side forces which motivated the tax reduction, and the awareness that too large a tax cut would be inflationary.)