Ivied halls are accommodating flip research into supply-side economics (Image via Wikipedia)
No economic policy innovation since the New Deal of the 1930s has proven more consequential than the supply-side revolution "“ arguably the most important component of the larger Reagan Revolution of the 1980s. Three decades removed from this epic event, you would expect to find it the subject of a mountain of books written by professional historians, the product of comprehensive research entailing all manner of sources, evidence, and interpretations. After all, three decades after 1933, a small library would have scarcely contained the books detailing the intellectual ancestry, policy history, and economic effects of the New Deal.
By comparison, there exists today not one single volume written by a professional historian solely about the supply-side revolution, outside of my own Econoclasts. Rather, shelves are filling with books that include chapter-length summaries of the supply-side revolution set in the context of larger narratives on the 1980s. While these works are being produced by eminent historians, the chapters on supply-side economics are typically thin and inaccurate.
The most prominent example of 2011 comes in a widely discussed book on recent American intellectual history, Age of Fracture by Princeton's Daniel T. Rodgers. The buzz in the academy is that Rodgers has given sage perspective on the intellectual underpinnings of the supply-side revolution, and the free-market movement in economics in general. Yet this is to gloss over considerable shortcomings.
Let's start with the theoretical problems. Rodgers makes the claim, true enough, that the supply-siders were animated by an old Napoleonic-era doctrine called Say's Law (defined below). But then comes this stunning misattribution: ""?Supply creates its own demand' was the supply-side circle's free translation." Only trouble is, this was no less than John Maynard Keynes's own tendentious rendering of Say's Law in the introductory pages of The General Theory of 1936.
Say's Law, as the supply-siders inspired by the work of Thomas Sowell have said, holds that when entrepreneurs act, they do so because they have seen in the status quo an opportunity for sales of a new good or service. Supply, then, does not create its own demand; supply accrues by dint of specific, unmet demand which a shrewd person of affairs has identified and chosen to fill.
Keynes tried to articulate that the key to Say's law was the wages paid to workers which came with any new production, wages which then fed into the economy as new "aggregate" demand. Keynes was compelled to say as much; otherwise his book would have failed to make sense. In effect, Keynes shot an arrow at the wall and painted a target around it. On this crazy gambit the foundation of the General Theory came to rest.
You're not going to make the mistake of associating supply-side views with Keynes's formulation of Say's Law if you weigh all the evidence . You might find a thing or two from a supply-sider in the 1970s that makes this point in a moment of confusion, but on balance quite the opposite. There is no chance you put things this way if you read the economist who was the intellectual font of supply-side economics, Robert A. Mundell.
Mundell receives no mention in Age of Fracture. Fair enough"”unless this volume aspires to any pretentions implicit or otherwise about being an intellectual history covering the rise of supply-side economics. Beguiling readers into making such an association is misleading as well. For the record, Mundell gained notoriety as a veritable ideas-factory within the University of Chicago economics department in the 1960s and early 1970s. Despite the fact that his textbook of 1968 was penetrating curricula everywhere, this preeminent editor of the Journal of Political Economy at length despaired that his principles of sound money and reduced taxation"”ideas which earned the Nobel Prize of 1999"”were not achieving enough traction in the profession, and so he appealed to the public by other means.
It was Mundell and his Chicago protégé Arthur Laffer who in 1974-75 clued in the editorial page of the Wall Street Journal, and others outside the academy, that the economics profession was oblivious to certain winning ideas, insisting further that an end-run was in order. People listened and acted for good reason. The inexplicable and recurring specter of stagflation-induced recessions was beginning to look like a permanent feature of the economy.
Yet Rodgers cannot resist, having ignored Mundell, writing that "A striking number of the leading organizers of the "?supply-side' movement were economic innocents," "flamboyant," and "self-taught." In his estimation, they were "popularizers" with "panacea salesman" and their own "Walt Whitman." Such an outpouring of hyperbole is fine, I suppose, as a journalistic device. If you're a historian writing this way, you had better have comprehensive command of the sources.
Forget about that in Age of Fracture. Not only are there no archival citations, there is not one direct citation from the bulletin board of supply-side economics in its glory days, the editorial page of the Wall Street Journal. How convincing can a book be that relies on the cursory impressions of supply-side economics done in the 1980s and 1990s?
Then there are the economic malapropisms "“ unsourced allegations about the Laffer curve, mistakes about supply-side claims concerning the savings rate as opposed to international capital flows, confusion over rounding errors in unemployment statistics "“ but these are to be expected when historians take holidays in economics.
The problem with composing a straight history of supply-side economics is that inevitably, you've got to make it an epic. It’s one whale of a success story "“ a decade of stagflation vanquished once and for all "“ with drama, personality, savvy, and intellectual heft in tow. If you're a scholar settled high in our tut-tutting and left-leaning establishment, brace yourself if you decide to write that book.
's Categories: Culture & Books, Economics, Op/Ed, Policy, byline=Brian Domitrovic
“In effect, Keynes shot an arrow at the wall and painted a target around it. On this crazy gambit the foundation of the General Theory came to rest.” – the most colorful description I’ve ever heard of Keynes’s fundamental error. Brilliant!
The formulation of the best writer in my department (who looks over my pieces), a member of the Texas Institute of Letters. He ascended to the seat in this veritable academie francaise previously occupied by Molly Ivins.
Pr. Domitrovic,
I how offer an perry and reposte. If the “Supply Side Revolution” is revolution that you say, where is the “supply side” of the US economy now thirty years later?
You wrote:”…when entrepreneurs act, they do so because they have seen in the status quo an opportunity for sales of a new good or service. Supply, then, does not create its own demand; supply accrues by dint of specific, unmet demand which a shrewd person of affairs has identified and chosen to fill.”
Yet since 1980 suppliers, e.g. first tier manufacturers, have largely disappeared from the United States economy. While still the largest manufacturing countries in world, the US economy is now dominated by second tier manufacturers and the defense industry. In 1980 Detroit was still the “Motor City” yet today it is a ghost town even though there are now cars being manufactured in the world than ever before, including by Ford.
Entrepreneurs did indeed act and moved their operations overseas.
As Michael Jensen has said, for all the money GM used for reinvestment in the 1980s, it could have bought both Toyota and Honda outright. The decline of Detroit sure wasn’t for lack of capital infusion stateside.
My view is that had the dollar not been a complete moonshot in the 1980s, there wouldn’t have been such a transfer out of manufacturing and into financial assets. Had the major currencies fixed to gold circa 1983, financial assets would have lost their appeal as a hedge against inflation and currency fluctuations, and the sectoral progress of the global economy would have been more rational. The supply-siders were way out front on this in the 1980s.
“Supply creates its own demand,” wasn’t a Keynesian sneer. It was Jude Wanniski’s explanation of supply side theory in THE WAY THE WORLD WORKS (p. 158). He passed the phrase on to Bruce Bartlett, editor of the the supply-side “bulletin board” at the WSJ (SEVEN FAT YEARS, p. 49). A serious historian of the supply- side surely knows as much.
Keynes puts these exact words in the foundational chapter of the General Theory. Therefore the news here is that some supply-siders 40 years later would copy him — would fall into his trap. Robert Bartley ran with exactly these words, in his memoir, far beyond any judiciousness.
But were there other supply-siders who called out to such guys and said hey, that’s not quite Say’s Law? We won’t know until somebody actually performs secondary research on the supply-side revolution. It’s a matter of the preponderance of evidence. That we don’t have such work — I can’t read any that I didn’t write — is just getting flat weird now that we’re in our 4th decade past the event.
But why don’t we go over all matters great and good at the Houston OAH?
Many of the big government and big tax advocates would certainly describe it as such. This explains the actions of big spending government and its leftist economist disciples these last 80 years. Confiscate as much public money as possible and spend it on worthless government services and goods. The supply will supposedly create the demand.
David, you did not supply us with any examples. Your comment sounded like vacuous platitudes and vague generalities. Please be more specific.
Gary Marshall
You’re right. Keynesianism is a weird inversion of Say’s Law. There’s not enough demand in the economy, so govt spending will create stuff that will goose demand, or at least purchasing power. The assumption is that govt spending typically produces useful goods — which even Keynes conceded cannot be the case.
Mr. Marshall,
You wrote:”…you did not supply us with any examples.”
Well I thought that I had with Detroit and the automobile industry but I can give another. In 2009 there were 58 million tons of steel produced in the US, in a distant fourth place behind China which produced a staggering 568 million tons, almost half of the world’s product of 1,220 tons. In 1978 the US produced 137 million tones out of world wide production of 791 million tons. The total US steel production had remained constant between 1960 (143 MT), 1970 (132 MT) but since 1980 it has dropped both in absolute amounts and as a percentage of world production. The can be said a whole range of first tier manufacturing industries, like textiles, automobiles, aircraft, &c.
Since 1980 there have been seven presidential administrations, five of which have embraced “Supply Side Economics” yet the Supply Side of the US economy has retreated dramatically. This despite the fact that the US population has risen dramatically with overall demand increasing.
I think that is pretty detailed, don’t you Mr. Marshall.
Pr. Domitrovic, why didn’t the suppliers respond to the Supply Side policies and expand production of steel? Why did they in fact reduce production of steel dramatically?
Steel is perhaps the industry that got nailed by stagflation the most. The USW was the first big union to get clued into bracket creep. In 1973, it negotiated a long-term deal where wages would increase with inflation plus 3%. This was just as mega-inflation was starting. So the companies shoveled enormous $ out the door, their revenues of course only keeping up with inflation.
Productivity could have made up the difference, but capital expenditures themselves were not indexed for inflation. So wages and capital were costing more and more. Soon the industry was hoarding the dwindling profits so as to get out of the maddening biz entirely. X bought MRO in 1982 as the process of cashiering the workforce began. The idea was that oil revenues increase not with but beyond inflation, and oil is a non-wage intensive biz (so no mandate to keep up w/bracket creep).
All these decisions were made as if the 1970s were the new normal. Thanks to the s-s rev, of ocurse they were not. Steel could have recovered more fully however again if the dollar had been stable esp against paragons of stability the mark and the yen. But the $ way overshot these.
All said, X as a steel producer has been a greatly profitable company since the 1990s, its workers paid handsomely — often in the 6 figures. If you lay off 160K and then call back 10K, the workforce will be exceptionally skilled and dedicated. Workers at X today are the creme de la creme of the working class.
There is a superlative book on all this, from the 1970s high point to the flattening in the 1980s, John P. Hoerr, And the Wolf Finally Came.
Do you have an interest in writing a follow-up to your wonderful book Econoclasts? Perhaps a biography of Robert Mundell or a deeper look at some of the critical moments that defined the supply-side revolution?
I’m going to keep my toe in the supply-side revolution, but that said I do think that there should be a rich plurality of voices on this major topic and so I must not camp on it. Boy does Mundell need a bio — but give it time, he’s still rolling. The author would have to be someone who appreciates the small, principality-like statelet environments he has always striven to call home, from Canadian to Swiss to Italian places (exception: the Upper West Side).
I have written one celebratory epic, but I think a historian should also be accomplished in writing critical narrative — I think of Richard Pipes’s incredibly civilized work in this vein. So I will be producing things concerning the rise and high tide of Keynesianism.
Hello David,
I did read through your follow up. So there was less actual steel production in the US. I am still not sure how that is a bad thing. Suppose all those unemployed steel workers went on to become electrical engineers or doctors. Would this not be a benefit? You really need to explain yourself.
Regards, Gary Marshall
Mr. Marshall,
Read Full Article »