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Paper Abstract: Theoretical evolution in ideas of Adam Smith, David Ricardo, neoclassical concepts, application of supply-side policies of Reagan. Paper Introduction: SUPPLY-SIDE ECONOMICS: DEVELOPMENT, THEORY, AND APPLICATION While Adam Smith is considered to be the founder of classical economic theory, he nevertheless incorporated several important concepts from thinking not generally ascribed to the classical school. David Hume's contention that the rate of interest depended on the rate of business profits formed the basis for Smith's interest rate theory, and Hume's quantity of money theory remains a part of economic theory. Two of the most influential of the first-generation market economists were Adam Smith and David Ricardo. In the formulation of economic theory, Adam Smith was principally concerned with the factors which led to increased wealth in an economy. Smith (131-136) contended that the cost of labor provided the basis for the determinat Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. A similar inability to adjust arevered theoretical approach led to monetarism's downfall. The results of this absurd situation included an almost completedestruction of the fiscal integrity of the federal government, stimulationof the economy during the boom phase of the business cycle, very high real(as opposed to nominal) interest rates, and a failure to effectivelyaddress the problems of millions of individuals who suffered significanteconomic dislocation problems during the recession. SUPPLY-SIDE ECONOMICS: DEVELOPMENT, THEORY, AND APPLICATION While Adam Smith is considered to be the founder of classical economictheory, he nevertheless incorporated several important concepts fromthinking not generally ascribed to the classical school. Macroeconomics Before Keynes. Rees, R. Stroup, and A. The appropriatecorrective measures, thus, are seen as fiscal reform and real depreciation(Dornbusch 7 2). Neo-classical theory emphasizes supply, and demand is viewedas a function of supply. Supply-side economic theory opposes theKeynesian model, in which aggregate demand is the propelling force. Neo-classical economic theory began to develop in the late-19th C.(Hausman 33). New York: Academic Press, 1989.Hausman, D. The approval rating of President Reagan plummeted along with theeconomy, and the Republican Party absorbed a worse than usual drubbing inthe 1982 congressional midterm elections. To reverse productivity declines, supply-sideeconomists recommend tax reductions, balanced governmental budgets, thederegulation of industry, and reduced social welfare spending to encouragepeople to work for lower wages (Ekelund and Hebert 468). Introduction. By contrast, supply-side fiscalists emphasize the interrelationshipbetween governmental tax and expenditure policy, and aggregate supply(Gwartney, Stroup, and Studenmund, 28 -282). In turn, prices and interest rates are functions ofmonetary policy--expansionary or restrictive--and may be dealt with in thecontext of such policies. Ed. Smith (131-136) also contended, however, that the factors ofsupply and demand also affected the actual price levels of commodities inthe market place. In such ananalysis, price and quantity are functions of supply and demand. Supply-side economists think that inflation, unemployment, anddeclining economic growth are the results of declining productivity(Ekelund and Hebert 467). Works CitedCochrane, J. Ricardo's earlywritings were primarily concerned with money and banking; however, in ThePrinciples of Political Economy and Taxation, which was published in 1817,Ricardo was primarily concerned with the formulation of laws which regulatethe distribution of economic product within an economy (Ekelund and Hebert13 -137). . Marx was thus correct when he stated thatRicardo's body of theory was heavily related to the problem of distributionand its implications for growth within an economy. In thismodel, supply always reacts to the stimulus of aggregate demand. D. Inturn, these economists view investment as a function of savings (Rees 335). Economic growth is viewed byneo-Keynesians as a function of demand. . Two of the most influential of the first-generation market economistswere Adam Smith and David Ricardo. B., and R. Inflation is viewed by these economistswithin the context of comparative static equilibrium analysis. Studenmund. Neo-classicists view economic growth as a function of investment. Keynes challenged this contention, andthe economic decline of the 193 s proved Keynes' point. In the formulation of economic theory,Adam Smith was principally concerned with the factors which led toincreased wealth in an economy. Harmondsworth, England: Penguin, 1978. The tax reduction goal of supply-sideeconomists continued to be sought by the Reagan administration; however,attempts to reduce government spending became a propaganda exercise for theadministration, wherein the administration sought to reduce spending onsocial programs while seeking increased spending on military programs butremained quite prepared to trade off cuts in social spending for increasesin military spending. In such a situation, theaction required to correct inflation would be to increase supply. The key element in the process, in Smith'sperception, was the accumulation of capital. For fiscal policy, thesupply-siders argued for tax reductions and governmental spendingreductions. Monetarist economic policy experienced an ascendancy in the wake ofthe failure of Keynesian and neo-classical policy makers to adjust to achanging environment ("Monetarism" 23-25). The most visiblemanifestations of the results of the economic policies (supply-side andotherwise) of the Reagan administration (and later the Bush administration)were the enormous federal budget deficits and a rapidly growing nationaldebt of almost unbelievable magnitude. 2nd ed. In early-1983, President Reaganbegan to look like another one-term president. .society are cast." Marx was not completely correct in his assessment ofRicardo because Ricardo did consider demand in his theories and analyses.Ricardo, however, did not emphasize demand to the same extent that he didproduction and distribution. Hebert. Later on, the law of markets was formulated by Jean-Baptiste Say.Say's law held that an under-utilization of resources could not occur.Based in great part on this contention, most economists prior to JohnMaynard Keynes contended that prolonged economic depressions could notoccur (Ekelund and Hebert 434-436). What the Reagan faction desiredabove all else were reductions in taxes and government spending. Asboth the supply and the demand curves have shifted to the right, the newstatic equilibrium includes prices and quantities at higher levels thancharacterized the displaced static equilibrium. David Ricardo built on the work of Adam Smith. . Within this model, thus, fiscal policyattempts to stimulate demand as a means of promoting economic growth. Thus, supply-side economists never had anythingdirectly to say about trade imbalances and unstable currency exchangerates. 5th ed. 1985: 23-25. Cambridge, England: Cambridge University Press, 1984. By Marx. Harmondsworth, England: Penguin, 1984.Smith, Adam. Smith thought that theaccumulation of capital permitted the creation of plant and equipment toassist human labor and the full employment of labor. . Thus, the supply of loanable funds is affected asfollows: "the volume of commodities offered to be used as capital willincrease as the percentage reward or rate of interest increases" (Cochrane7 ). The non-monetarist model implies that both domestic inflation and external balanceof payments deficits are caused by budget deficits. The Reaganomics moniker lasted into the first orsecond year of the second term of the Reagan administration; however,influence of supply-side economists all but disappeared after the midtermcongressional elections in 1982. The Philosophy of Economics: An Anthology. H. The Purchasing Power of Money. In actualpractice, however, the producer incentives were implemented during a timewhen demand was declining rapidly, and, under such conditions, all theproduction incentives in the world will not persuade producers to creategoods for which no demand exists. . As a consequence, the economy plummetedinto the worst recession since the 193 s, and the federal government budgetdeficit soared. The Reagan administration sought and got a tax reform package in 1981,which reduced federal government revenues. Hausman. The tax reform inparticular, however, was hailed as providing the supply-side incentives forproducers, which would lead to surging economic growth. Introduction. Thus, actions to promote economic growth, in the view of theseeconomists, would also stimulate employment. Economics: A History. Supply-side economics was seldom mentioned again,although the supply-side goal of tax reduction continued to be pursued bythe Reagan administration in its second term. "Stabilization Policies in Developing Countries: What Have We Learned?" World Development, 1 (1985): 7 1-7 8.Ekelund, R. He contended further that, as labor cost the same,regardless of which land on which it was applied, it would encouragecapital to be invested at the place of highest return, until the process ofdiminishing returns caused profits on all cultivated land to become equal. 1-5 .Marx, Karl. With less success, theadministration also was able to reduce federal spending. Smith (131-136) contended that the cost oflabor provided the basis for the determination of the value of a commodity. The resultingupward sloping curve derives from the "fact that . M., ed. F. Supply-side economic theory is an approach to fiscal policy (Gwartney,Stroup, and Studenmund 227). The Reagan Administration, however, refused to cut governmentspending on national defense or to even consider an increase in taxes. Inopposition, the Democratically-controlled Congress refused to cut to anysignificant degree social expenditures without accompanying cuts in defensespending and increases in taxes. Thus, with no publicannouncement, the fiscal gears of the administration were shifted, and analmost pure Keynesian fiscal policy was implemented by the administration,and a friendly Federal Reserve, which did not want a Democraticpresidential victory in 1984, cooperated in the context of monetary policy--a surge in the money supply accompanied the new fiscal policy. N.p.: 1858. . Rpt. Demandstimulation would be recommended, along with decreased taxes, increasedgovernmental spending, or some combination of the two to generate agovernmental budget deficit. Within the framework described in the preceding paragraph, Smiththought that the size of an economy's output should be limited only by thesize of markets--or demand. Pelican Classics Edition. TheKeynesian model was based on the premise that, until the capacityconstraint is reached within an economy, supply remains passive. Fisher (149-183) applied utility analysis to this approach to thesupply of loanable funds, as a way of demonstrating exactly how muchsavings would be made available for loans to business firms and to otherinvestors under varying changes in the rate of interest. Thus, inthe Keynesian model, there is a link between a full-employment deficit orsurplus and aggregate demand. . overpower . Inthe monetarist view, trade imbalances and unstable currency exchange ratesare functions of price levels and interest rates in the economies of thecurrencies involved. in The Philosophy of Economics. The monetarist model moves away from a fiscally-basedexplanation of the stabilization problem. D., R. Sluggish growth thus would becountered by fiscal actions to place more money in the economy. With the shift in fiscal and monetary policies, the economy began torecover, and the economic recovery led to a Reagan victory in the 1984presidential election. Ricardo contended thatcosts and profits were the same on all land, regardless of its marginalproductivity. 1776. These outcomes are partly theresult of the implementation of supply-side fiscal policies at aninappropriate time but are largely the result of the borrowing of bits andpieces of supply-side fiscal theory by the Reagan administration, whichthen added those bits and pieces Keynesian-style pump priming and createdalarming long-term consequences for the economy. Ricardo was described by Karl Marx (16 ) as an economist who tended tofocus on "production alone," having "defined distribution as the exclusiveobject of economics," because he "conceived the forms of distribution asthe most specific expression into which the agents of production of a . To accomplish this purpose, he developed a model based on thepredominantly agricultural economy of his day. M. Thus,subsequent to the inauguration of President Reagan in 1981, supply-sideeconomics provided the basis for Reagan administration fiscal policy, whichwas dubbed Reaganomics. The supply-side approach to fiscal policy was made-to-order for theReagan campaign for president in 198 . New York: McGraw-Hill, 1983.Fisher, I. By Hausman. When the economy recovered,however, a true Keynesian approach would have stopped the stimulation ofthe economy and would have moved to return governmental finance to a stableposition. Asbuyers' income increases, demand increases, and, in turn, prices increase.Equilibrium is restored as supply is increased to the level of demand. preference for present, over future,consumption" (Cochrane 71). L. Adam Smith considered that the factors of supply and demand werethe major determinants of commodity prices (although the value of laborconsumed in their production provided a basis for the determination ofvalue). rising rates ofinterest . Similarly, expanding and restricting the money supply may be usedto either stimulate or retard economic growth and, in turn, employment. Economics. A History of Economic Theory and Method. He contended further that it was the relative expenditure of labor thatmattered. Neo-classical economics experienced a rebirth subsequent to the end ofthe Second World War (Rees 325). Grundrisse. Smith also thoughtthat free competition was essential for the development of an efficienteconomy. Thus, to stimulate economic growth, neo-classical economists wouldrecommend the implementation of policies designed to stimulate savings.Neo-classical economists view unemployment as a function of economicgrowth. New York: McGraw-Hill, 1964.Gwartney, J. Monetarists tend to view all macroeconomic phenomena within thecontext of the supply of money (Gwartney, Stroup, and Studenmund 295).Inflation thus is, according to monetarists, an outcome of an expansionarymonetary policy and can be corrected through a more restrictive monetarypolicy. About the closestto the development of a body of economic theory that supply-side fiscalistsever came was the simplistic "good news" Laffer Curve (Gwartney, Stroup,and Studenmund 275). Atlanta: Scott, Foresman, 197 .Dornbusch, R. David Hume'scontention that the rate of interest depended on the rate of businessprofits formed the basis for Smith's interest rate theory, and Hume'squantity of money theory remains a part of economic theory. It is the contention of thesupply-side fiscalists that relative price changes induced throughgovernmental tax and expenditure policy would generate productionincentives, thereby promoting economic growth. 149-172."Monetarism: An Ebbing Tide?" Economist 27 Apr. The Wealth of Nations. Cambridge, England: Cambridge University Press, 1984. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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