A Demand Side Lineage - Draft

Demand Side economics may at first blush be seen as a counter to Supply Side economics, a Reagan era fad that served as pretext for trickle down policies.  But Demand Side has a longer and more noble lineage.  Arising from the theoretical work of John Maynard Keynes, the greatest economic mind of the past century, and from the pragmatic policies of the New Deal, Demand Side is a system that works and explains.

John Maynard Keynes and the Great Depression

The Great Depression, whatever its causes, was a contradiction to the free market capitalism as practiced in the United States and to its Classical apologists. The causes have been extensively debated, but the contradiction lies not in the advent, but in its lingering and worsening year after year. In Classical theory, a condition such as the Depression could not persist for any meaningful length of time. When the Depression did persist, the response by economists had to be either learning and adaptation or denial. There was no shortage of the latter in academia, but political reality propelled the former to the fore in the arena of public policy.

Keynes identified a paucity of effective demand as the cause of the prolonged slump. Economic activity was not returning to adequate levels because there was no impulse to draw it there. In classical theory, production itself always provided the means to purchase. This was codified in Say's Law, and adherence to it determined whether you were a legitimate economist or a crackpot. Keynes addressed his most stinging critiques to Say's Law and its totemistic Classical followers. There is no automatic stabilizing mechanism to the a market economy, he said.  This is the nut of Demand Side economics: It is the strength and direction of demand which organizes and energizes a society's economy. (This means effective demand, of course, not simply an intense desire or even need, but a demand with real money behind it.)

Leon Keyserling, the New Deal and the Postwar Prosperity

Deficit spending recommended itself as well to activist economists in Franklin Roosevelt's New Deal, but from concern for the unemployed, aged, disabled and impoverished. Programs to help these groups in the absence of an ability by the government to raise sufficient revenue created the deficit spending Keynes prescribed. During the dark years of the 1930s, however, the efforts of the Deal never reached a scale sufficient to banish all doubts or completely invigorate the economy. That scale was found in World War II.

The massive government action and mobilization of the economy required by the War washed the Depression away virtually overnight. Domestic living standards actually rose even as the society's treasure poured into munitions, war machinery, massive operations across the globe - in other words, into products and services that were entirely destructive or would eventually be destroyed. In spite of nonproductive, non-consumer goods being produced on a tremendous scale, the economy also produced more consumer goods for the people on the home front.

This ratified Keynesianism, and until the middle of the 1970s, public policy was guided by a Demand Side understanding. At the same time the United States was in a favored position industrially by virtue of the destruction of the competing industry of Europe and Japan. The two converged in a broad prosperity that had never before been seen.

One of the draftsmen of the New Deal and one of the architects of the full employment that followed the war was little-known economist Leon Keyserling.


John Kenneth Galbraith and the rise of the corporate state

As was Keynes, American economist John Kenneth Galbraith was active in public service and at the same time accomplished in theory and teaching. Canadian born, but raised at Harvard, Galbraith moved into the federal government at the outset of World War II, where he directed the Office of Price Administration and was literally controller of prices in the United States. This was the second most powerful civilian post in the management of the wartime economy. Effective programs for price control were essential to keep wartime shortages from turning into crippling inflation or spawning debilitating black markets. After the war, Galbraith led the post-mortem survey and analysis of the European Theater. Under John F. Kennedy he served as ambassador to India. Often described as a maverick, Galbraith simply examined the affluence and institutional changes that were forming without the self-congratulation for the good times that followed the war. The conceit of Americans was by no means confined to economists, but the prosperity that occasioned it was based less on the imagined American virtues than on the advantage of having an infrastructure intact and an industrial capacity left undamaged by the war.

Galbraith described the rise of the corporation to dominance, the rise of government as a primary component of and actor in the economy, and the immense explosion of material prosperity that followed the War. Galbraith's writings explored a need for institutional counterweights to the Corporate Oligarchy - unions, governmental oversight, regulations, and social insurance. His foundational New Industrial State defined the part of the economy dominated by the large corporations as the Industrial System. This was the chief trait of the new industrial state. While previously corporations had rule industries where scale of operations required bigness, Galbraith saw that they had moved into other parts of the economy as well. This pervasiveness is even more apparent today than when Galbraith wrote in 1967. The New Industrial State dissected the Corporate Oligarchy, the technical reasons for its arising, the group think which he called the Technostructure, its goals, how it determined prices and controlled markets, and its ever more involved relationship with the state.

The direct look Galbraith took at the American scene contrasted starkly with the approach taken by the Conservative economic schools (Monetarist, Neoclassical, Neoliberal, Supply Side schools). These began and ended with neat and simple theory and assumed away inconvenient reality, ignoring the power and even the presence of the Corporate Oligarchy. The resulting world did not exist, but at least it was marked by healthy free competition. The popularity of these schools derived from their political convenience, to their appeal to a resurgent conservative bloc (particularly after the Vietnam War) and to eager sponsorship from the very corporations whose power they failed to acknowledge.

Hyman Minsky and the Rise of Economic Instability

Joseph Stiglitz and Globalization

Not only did the poor get poorer in the United States (in inflation-adjusted, or "real," terms) beginning in the late 1970s, but also around the globe, particularly in Africa and Latin America. Some Asian economies did begin to develop, but others struggled. Remarkable successes have been scored by China, Japan, South Korea, and others. Tragedies have occurred in Africa and Latin America. It was no coincidence that the economic troubles of these countries followed their adoption of the charts of the free marketeers. The conservative thinking that had failed so well within the United States failed even better in these countries. Those under the sponsorship of the dominant corporations fell extremely hard. This international situation has been the context for the work of Joseph E. Stiglitz on Globalization.

Stiglitz was awarded the Nobel Prize in Economics in 2001 for work which demonstrated the shortcomings of the hypothesis of free market efficiency in the absence of perfect information. Like Keynes and Galbraith, Stiglitz contributed significantly in public life. He served as chief economist in the administration of Bill Clinton and later as senior vice president and chief economist to the World Bank. Two of his books Globalization and Its Discontents and Making Globalization Work describe the causes and conditions of a world economy in stress and unable to meet the desperate need of billions of its people.

James K. Galbraith and the Predator State

George Soros and the New Paradigm for Markets


The work of these giants of the theory and practice of economics - Keynes, Keyserling, Galbraith the elder,  Minsky, Stiglitz, Galbraith the younger and Soros - informs the Demand Side economics that worked before and can work again.  Unlike Neoclassical and other schools, Demand Side has developed with the society it seeks to explain.  Each of these men, Minsky aside, held highly responsible positions in government or the private sector, and each contributed substantially to the advancement of understanding in the discipline of economics.