Supply-side economics has taken Washington by storm. Both a diagnosis and a prescription, supply-side economics comprises ideas about what is wrong with the economy and remedies to put it right. As its name would indicate, both diagnosis and prescription emphasize the actual production of goods and services rather than the buying of them. From this vantage point, supply-siders see our fundamental difficulties as constraints, mainly caused by taxes that deter productive effort, rather than as problems deriving from a lack of purchasing power. We catch a vision of the economy as a coiled spring held down by the weight of government. Remove the weight and the spring will reveal its inherent force.
Most of the heated discussions about supply-side economics are concerned with how much tension the spring really has and how vigorously it will respond to the removal of various tax disincentives. I shall come back to these matters later. But it seems foolish to begin an appraisal of supply-side economics with debates about how far we must cut income taxes to achieve renewed growth, or how quickly inflation will be overcome by increased output. At the root of all supply-side remedies lie profoundly held if sometimes implicit convictions about the nature of the capitalist system itself. Since I am convinced that these views are wrong, I cannot get much exercised about the particular prescription on supply-side medicines. The task, rather, is to examine the patient.
I do not know of any formal definition or description of capitalism that has been provided by supply-side economics. But a coherent image of the system arises nonetheless from the writings of its proponents. I would sum it up as follows:
Capitalism is a “natural” economic system, in that it accords in some deep way with human nature. It is the manner of organizing production and distribution to which mankind will spontaneously drift, once impediments of various kinds (including ignorance) are taken away.
Capitalism is an evolutionary system. Its evolutionary tendencies are described by the term growth. Growth means an increase in real per capita income. This increase in real income, reasonably distributed among the population, is perceived as bringing welcome social and political consequences: higher individual morale, less political disaffection.
Growth arises naturally within capitalism from the interplay of two elemental constituents of the system. One of these is the profit motive, embodied in both individual and institutional agencies, acting as a force for innovative and expansionary economic activity. The other is the restraining mechanism of competition. The two forces together comprise the thrust and feedback of the market.
The capitalist economy contains two sectors, one public, one private. The private sector is mainly responsible for growth. The public sector’s main responsibility is the provision of defense, law and order, and necessary public goods. Beyond these functions, whose boundaries are admittedly not always clear-cut, government is deemed to weigh on, and to diminish the vigor of, the private sector.
Capitalism is an international system, in that its constituent nation-states are bound …
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