Economics in a nutshell: To Supply or to Demand, that is the question ...

The history of Western economic philosophy can be traced to the beginnings of secular reasoning and logic recorded by early Mediterranean and Middle Eastern philosophers.  What follows is a simplified (indeed, oversimplified) exposition on economics.  Brevity requires making many assertions without providing volumes of supporting discussion.  If nothing else, the following should provide fodder for some heated debate.

First it is necessary to understand that economics is not a science.  Economics is a philosophic endeavor relying upon inductive and deductive reasoning and logic more than the scientific method.  Keep in mind that economic correlation is not the same thing as causation.  Correlation may support an economic argument but proof or refutation of the argument depends upon logical consistency.  Second it is necessary to understand the distinction between macroeconomics and microeconomics.  Macroeconomics is a philosophical description of collective or aggregate economic activity.  Microeconomics, in simple terms, is a philosophical description of individual economic activity.

For both macro and micro scale philosophical descriptions there are three fundamental economic activities.

•  Labor collects wages.

•  Property collects rent.

•  Capital (money) collects interest.

Wages, rent, and interest are quantifiable measures of economic activity that provide a means of gauging the health of the economy and economic growth.  The measures also allow identifying imbalances in the economy that guide future economic activity and government policy.  However, those quantitative measures are also influenced by philosophical reasoning about how an economy functions, the purpose of disparate economic activity, and the role of the disparate economic activities for the health of the economy.  Another thing to remember is that wages, rent, and interest are the result of supplying something; representing only half of the economic activity.

With those introductory explanations out of the way, let the (admittedly unsupported) assertions begin and the self indulgent debate follow.

Reconciling those three disparate economic activities at both macro and micro scale requires establishing a common system of valuation.  Much of economic philosophical discussion that has transpired throughout history attempts to establish common valuation for completely different economic activities in an attempt to create a unified theory of economics; one set of economic laws that governs all economic activity.   Mercantilists focused attention on property, Classical economists focused attention on labor, and Neo-classical economists focused attention on money.  The philosophical economic debate devolved into a competition among those controlling the supply of labor or property or capital.   The common thesis of the debate has been that those controlling supply should be the basis for establishing a common system of valuation.  Throughout history the supply side of one of the three fundamental economic activities has achieved temporary dominance over the others; becoming the temporary basis for collective economic activity.  History confirms that governmental economic policy (by any form of government) has most often been to favor and protect those controlling supply.

During the latter half of the nineteenth century a new philosophical idea emerged that common valuation could be determined from demand and consumption.  The Austrian School focused attention on attempting to quantify demand through measures of usefulness to the consumer; the concept of marginal utility.  However, the Austrian economic philosophers ensnared themselves in micro scale economics by focusing attention on the idea of methodical individualism.  The Austrians tried to use the non-economic utopian philosophical ideal of personal liberty (freedom of choice) to reconcile the natural competition between the three fundamental economic activities; wages, rent, and interest.   Maynard Keynes attempted to qualitatively describe collective demand at the macro scale.  Keynes argument was that individual choice was naturally constrained by competition between the three fundamental economic activities but that natural competition was essentially unimportant for measures of collective consumption and demand.   Keynes argument was that targeted stimulation of demand in one of the three fundamental economic activities would increase demand in the other two; increasing collective demand thereby providing a common basis for valuation.   Keynes premise was that economically stimulating collective demand would provide liberty (freedom of choice); economic demand was not dependent upon the idea of liberty, the opposite was the case.  Keynes identified that demand and supply were codependent but that demand provided the common means of valuation within the economy.  Keynes argument was that government policy should be directed toward measures of consumption rather than measures of supply to correct imbalances in the economy and provide economic growth.

During the latter half of the twentieth century a new philosophy of economics began to rise to the forefront of philosophical debate: Social Economics.  A basic premise of Social Economics is that demand (and consumption) is a competition to obtain security, comfort, and well being.  While prior economic philosophies focused attention on competition between suppliers; Social Economics focuses attention on competition between consumers.  The common system of valuation is based upon demand measured by social conflict.  The philosophical argument is that social conflict results from unfulfilled demand caused by competition between those controlling supplies.  Demand seeks supply that maximizes security, comfort, and well being; competition among suppliers establishes barriers that inhibits supply and results in social conflict.  Competition (especially among suppliers) must be stringently regulated to avoid establishing barriers and imbalances for supply and the emergence of social conflict.  Freedom of choice is the sole province of consumers; suppliers have little or no freedom of choice so as to avoid competition that interferes with meeting demand.

An odd facet of Social Economics has been the inability to resolve the natural competition between wages, rent, and interest.  Social Economists are attempting to rely on the idea of central planning as a means of overcoming natural competition.  The social economic experiment of Communism failed because it did not accommodate and provide freedom of choice for consumers.  Communist economic policy was still wedded to the supply-side economic philosophy of attempting to economically favor internal supply through protective government policy while imposing regulation on competition between consumers to prevent satisfying demand from sources not favored by government policy.  Today the emphasis appears to be an attempt to conflate the economic philosophies of Mercantilism, Classical economics, and Neo-classical economics into policy mechanisms for stringently regulating competition between suppliers and maximize supply of security, comfort, and well being from any source to avoid social conflict.  Social Economics has evolved to include the ideas that economic development can be measured by ability to consume, competition among suppliers can be eliminated through free trade, social conflict indicates urgent need for governments to stimulate and support consumption, and improvements in quality of life completely offset any losses of wages, rent, or interest.

What we are experiencing today is a rather confusing contest for dominance over governmental economic policy.  The historical supply-side economic policy approach, utilized by most forms of government in the past, is being challenged by a robust emerging demand-side economic philosophy.  Over the last century Austrian demand-side economic philosophy has significantly influenced government policy in Europe while Keynesian demand-side philosophy influenced policy in the United States.  While the outcome of the contest is far from certain, it appears that the increasing influence of demand-side economic philosophy is here to stay.

(Image source:   Pixabay   Image is identified as being in the public domain.)