Keynesian and Supply-Side Economics

In my view supply-side economist, the monetarist in particular, and the Keynesians, both favor central banking in regard to fractional reserve. In this respect, they are more or less the same in that Keynesian manages demand while the supply-side manage supply.

According to a supply-side economist, growth is by giving incentives to producers in order to produce goods and services and to increase flexibility by minimizing regulation. Supply-side economist aims at increasing or decreasing the money supply in order to manage the economy and manipulate the interest rate. This is in contrast to the Keynesian economist opinion that government spending and taxes affect the economy by directly changing the composition or amount of total “aggregate demand” for services and goods.

The main concern of a supply-side economist is to reduce government transfer payments, which includes welfare and social security services. This means a reduction in government spending is directly proportional to the reduction in subsidies to consumption hence the supply-side economist is not for limiting the growth of demand, as it will change its composition. On the other hand, the Keynesian theory argues that the aggregate demand is influenced by the economic decisions “both private and public”, which sometimes behave erratically (Allan, 1981). These public decisions include those on the fiscal and monetary policies.

The supply-side economist is of the opinion that excessive subsequent stimulation of demand is restricting the growth of supply due to the government taxes and regulation, which slowed the investment (Cowen, 1980). Keynesian opposes the supply-side economist opinions by arguing that changes in aggregate demand, whether anticipated or not has a greatest short-run effect on employment and real output and not on prices. This ideal is real, for instance, the Philips curve, which shows that inflation rise slowly only when there is a fall in unemployment.

Finally, the supply-side economist argues that, by making it more to invest and save, businesses will increase productivity, produce growth and raise investment, and not a recession (James, & Richard, 1980). Generally, it is no longer government verse market but rather supply management economics and Keynesian demand management economics. From the above arguments, this is evidence that the two uses different techniques to approach economy, i.e., Supply and demand side of the economy.

Reference:

  1. Allan, H., (1981). Keynes General Theory: A Different Perspective, Journal of Economic Literature, 19 (l), pp. 61-67.
  2. Cowen, T., (1980). Supply-Side Economics: Another View, Policy Report, pp. 5-7.
  3. James, G., & Richard, S., (1980). The Creation of Economic Chaos: Inflation, Unemployment and the Keynesian Revolution, The Intercollegiate. pp. 3-9.

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