Answer to Question #138069 in Economics for Shravya

Question

What is theory of supply

Answer 1

The economic theory of supply was developed mainly by American economists: A. Laffer, M. Feldstein, R. Regan in the 1970s.

The peculiarity of the supply economy is that it is not a holistic concept, not a complete and interconnected system of views, provisions, methods of theoretical analysis, but, mainly, a set of practical proposals and recommendations.

Supply economics encompasses a range of practical issues aimed at stimulating production, investment and employment. Among them are recommendations in the field of tax policy; the policy of privatizing state enterprises; improving the budget; reduction in social spending.

According to the representatives of this theory, the market is the only normal way of organizing the economy. They oppose the regulation of the economy by the state, believing that regulation is evil, leading to a decrease in the efficiency, initiatives, and energy of participants in economic activity.

The main idea of ​​supply economics is to move away from Keynesian methods of stimulating demand, translating efforts to support the factors that determine supply. The reasons for inflation are seen in high tax rates, in the financial policy of the state, which provokes an increase in costs. Higher prices are the reaction of producers to the undesirable consequences of economic policy.

The main recommendations of the economic theory of supply are:

Tax cuts to stimulate investment. Reducing taxes for entrepreneurs will increase their income and savings; as a result, savings will grow, and the level of interest rates will decrease. A reduction in payroll taxes will increase the attractiveness of additional work and additional earnings. As a result, the supply of labor will increase, and incentives to participate in production activities will increase. Hence the name of the concept under consideration - proposal theory.

Privatization of state-owned enterprises. It will allow obtaining additional financial resources and reducing the size of the state debt.

Budget recovery. Supply theorists oppose budget deficits. They believe that the budget should not be viewed as a monetary policy instrument.

Freezing social programs. The social security system existing in the West has two negative aspects: 1) it causes an unjustified increase in government revenues, exacerbates the budget deficit; 2) restrains the labor activity of the population.