Supply-Side Economics: Contrasting Austrian Theory

Supply-side economics is a macroeconomic theory that argues economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade. It is based on the idea that production (i.e., the supply of goods and services) is more important than demand in determining economic growth. This theory is in stark contrast to Keynesian theory, which includes the idea that demand can falter. Supply-side economics was notably supported by US President Ronald Reagan in the 1980s, who implemented large tax cuts. How does this differ from Austrian economic theories?

Supply-side economics focuses on production, while Austrian economics focuses on demand

Austrian economics, on the other hand, is based on the assumption that increases in GNP result from increased spending. It is a demand-side theory that tries to bring the economy to its existing full capacity by increasing demand, primarily through fiscal policy. Austrian economics is typically held in contrast to supply-side economics, which focuses on production rather than demand.

The differences between supply-side and Austrian economics can be seen in their respective approaches to economic growth. Supply-side economics emphasises the importance of production and supply, while Austrian economics emphasises the role of demand and spending. Supply-side economics argues that lowering taxes and decreasing regulation will increase supply and lead to economic growth, while Austrian economics argues that increasing demand through fiscal policy will lead to increased spending and economic growth.

Another key difference between the two theories is their focus on the role of the government. Supply-side economics advocates for a limited government role in the economy, believing that lowering taxes and decreasing regulation will encourage economic growth. Austrian economics, on the other hand, recognises the importance of the government in ensuring a stable economy. It emphasises the role of the government in creating a favourable environment for businesses and consumers, including maintaining a sound monetary policy and ensuring a level playing field for competition.

Overall, supply-side economics and Austrian economics represent two distinct approaches to economic theory, with supply-side economics focusing on production and supply, while Austrian economics focuses on demand and spending.

Supply-side economics supports lowering taxes, while Austrian economics does not

On the other hand, Austrian economics does not advocate for lowering taxes. While there are many differences between supply-side and Austrian economics, the two schools of thought differ in their approach to taxation. Austrian economics, also known as the Austrian School, is a heterodox collection of economic thoughts that originated in Vienna in the late 19th and early 20th centuries. It emphasizes the role of the individual in the economy and promotes a free-market approach with minimal government intervention.

One of the key distinctions between supply-side economics and Austrian economics lies in their respective views on the role of the state. Supply-side economics acknowledges the role of the government in shaping economic policies, particularly through fiscal and monetary measures. In contrast, Austrian economics espouses a more laissez-faire perspective, advocating for a minimal role for the state in economic affairs. This divergence in perspectives influences their stances on taxation.

Supply-side economics recognizes the impact of taxation on economic behaviour and advocates for lower taxes to stimulate economic growth. It suggests that reducing taxes can increase incentives for individuals to work harder, invest more, and pursue entrepreneurial ventures. This, in turn, can lead to increased production, higher employment rates, and ultimately, economic expansion.

In contrast, Austrian economics emphasizes the importance of sound money, free markets, and the elimination of government intervention, including taxation. While it does not explicitly oppose all forms of taxation, it views taxation as a form of government intervention that can distort market forces and impede economic progress. Austrian economics promotes a more natural and organic approach to economic growth, where individuals are free to make choices without the burden of excessive taxation.

Furthermore, supply-side economics and Austrian economics differ in their underlying assumptions about human behaviour and the functioning of the economy. Supply-side economics assumes that individuals will respond positively to tax cuts by increasing their economic activities. Austrian economics, on the other hand, recognizes the complexity of human action and emphasizes the role of subjective values and preferences in economic decision-making. It suggests that individuals may not always respond predictably to tax cuts and that other factors, such as personal goals and risk tolerance, also influence economic behaviour.

Supply-side economics supports decreasing regulation, while Austrian economics does not

Supply-side economics was championed by US President Ronald Reagan in the 1980s, who inherited an economy with high inflation and unemployment. Reagan's large, across-the-board tax cuts are an example of supply-side economics in action.

Supply-side economics argues that fiscal policy may lead to changes in supply as well as in demand. So, when marginal tax rates are high, consumers pursue additional leisure and current consumption instead of pursuing current income and extra income in the future. This leads to a decline in work effort and investment, which in turn causes a decrease in production and GNP, regardless of total demand levels.

Austrian economics, on the other hand, does not support decreasing regulation. While there are many different schools of Austrian economic thought, they generally emphasise the importance of individual freedom and oppose government intervention in the economy. Austrian economics is often associated with the ideas of free-market capitalism and laissez-faire economics, which argue for minimal government regulation and a reliance on market forces to determine economic outcomes.

Supply-side economics supports free trade, while Austrian economics does not

Supply-side economics is a macroeconomic theory that postulates that economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade. According to this theory, consumers will benefit from a greater supply of goods and services at lower prices, and employment will increase. Supply-side fiscal policies are designed to increase aggregate supply, as opposed to aggregate demand, thereby expanding output and employment while lowering prices.

The core point of supply-side economics is that production (i.e., the "supply" of goods and services) is more important than demand in determining economic growth. This theory is typically held in stark contrast to the Keynesian theory, which includes the idea that demand can falter. Supply-side economics was supported by US President Ronald Reagan in the 1980s, who inherited an economy with high inflation and unemployment. Reagan's large, across-the-board tax cuts are an example of supply-side economics in action.

Austrian economics, on the other hand, does not explicitly support free trade. While it values voluntary exchange and the free market, it does not necessarily advocate for free trade policies. Austrian economics emphasises the benefits of free exchange, arguing that it leads to the mutual benefit of both parties and creates a mechanism of harmony, adjustment, and precision in allocating resources and deciding upon prices. However, it does not directly address the issue of free trade or globalised trade policies.

Supply-side economics supports investment in human capital, while Austrian economics does not

Supply-side economics is a macroeconomic theory that suggests economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade. Supply-side fiscal policies are designed to increase aggregate supply, as opposed to aggregate demand, thereby expanding output and employment while lowering prices. Investments in human capital, such as education, healthcare, and encouraging the transfer of technologies and business processes, are seen as a way to improve productivity (output per worker).

Austrian economics, on the other hand, does not explicitly support investment in human capital. Instead, it focuses on the principle of time preference, which states that individuals prefer the enjoyment of goods closer to the present. This influences decisions about investment and savings. Austrian economics also emphasises the role of capital formation in increasing production. However, it does not consider investment in human capital as a direct means to boost employment, recognising that simply increasing expenditure on production does not guarantee the employment of people without jobs. Instead, Austrian economics attributes unemployment to a structural mismatch between the skills of the unemployed and the requirements of specific capital items.

Frequently asked questions