Demand Vs Supply-side Economics

Essay by PaperNerd ContributorUniversity, Master's March 2001

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In theory, both supply-side economics and demand-side economics would work to bring about economic stability and controlled growth, regardless of their different methods. But in practice the results are somewhat different than theoretically anticipated.

The school of economic thought and practice a nation adheres to depends largely on what it believes the role of government, of business and industry, and of consumers are.

Supply-siders stress the importance of the supply-side of the economy that creates wealth and production, over the demand-side that consumes wealth and production. Their basic belief is that supply creates demand and that production is limited by supply, not by demand. Supply-siders dislike government involvement in the economy. They believe that government regulations are harmful to the economy because they hamper production, reduce flexibility, and stifle competition. They prefer an economy where businessmen are free to exercise entrepreneurship and are motivated by the rewards they receive for their labour to work hard and invest.

President Ronald Reagan's concept of capitalism fits very closely with the supply-side doctrine in this aspect. He wanted to end big government because he felt it over spent and imposed restrictions on business that did more harm than good by reducing profits and thereby slowing economic growth. His response was to cut the number of government jobs and reducing federal environmental, health, and safety regulations. Such a move allows business firms and factories to operate and compete more freely. Money saved on equipment and changes that are necessary to meet government standards can be used to re-invest in business to stimulate employment, production, and expansion. Without barriers, like that of pollution control or extensive government inspections, production can proceed at a faster pace and more profit can be achieved and injected into the economy. However, this economic growth came at the cost...