Economic Theory

The supply side needs love too


Government and Institutions
Tax and Fiscal Policy
When economists talk about the UK economy, the discussion tends to be framed in terms of the ongoing recovery from the financial crisis and its associated recession. That crisis and the vivid images of pensioners queuing outside the branches of Northern Rock which it produced date from the autumn of 2007, the best part of a decade ago.

There is undeniable disagreement between economists about the role of aggregate demand in determining short run output and the appropriate role for the state in manipulating it via monetary and fiscal measures. However there is consensus on the fact that our long run standard of living is derived from supply side factors. The major ones being the stock of capital (both physical and human), the state of technological knowledge and the nature of the institutional framework these factors have to work within.

In a world where global growth resumed robustly from 2010 onwards, the disappointing recent performance of the UK economy requires an explanation beyond depressed aggregate demand and the ineffective nature of monetary policy at the zero lower bound, yet most economic analysis focuses on these issues. Indeed, if the supply side of the economy is mentioned at all, it is usually a one sentence remark about the need for unspecified ‘structural reforms’.

Nevertheless if we want to understand why the UK underperforms relative to richer countries it is these supply side factors which must be discussed. A lack of technological knowledge can be ruled out given the near-instantaneous spread of scientific advances across the globe. The enviable period of relatively undisturbed capital accumulation enjoyed by the UK since the onset of the industrial age also makes it unlikely that a shortage of capital is the key factor preventing us from achieving at least parity in growth rates with the wealthiest developed nations. Instead, economists should explain to a general audience how the nature of our institutional structure can help or hinder the economy.

Unfortunately, focussing on the ways institutions affect growth has acquired a reputation for being something pursued only by those holding right-wing ideological views, but in the UK’s present situation this need not be the case. There is no principled reason why economists holding broadly left wing views about the desirability of redistribution and well-funded public services should be supporting laws such as our restrictive land use planning regulations which benefit wealthy homeowners and force low income people to pay higher rents. The ongoing ‘war’ on drugs which persecutes those at the bottom of society alongside increasingly determined efforts to restrict the number of migrants able to work within Britain are also examples of supply side restrictions which economists of all ideological hues can unite in discouraging.

Many of these issues are undeniably controversial with the public but this is where the input of economists is most needed. However understandable the reluctance of economists to attack misguided public opinions, if they do not do this who will? Continued hopes that politicians will lead the public in a more economically sensible direction represent a fundamental misunderstanding about the democratic process and the incentives facing elected officials. As highlighted by economist Bryan Caplan, politicians reflect public opinion, rather than leading it.

There should also be more focus on the moral case for a pro-growth agenda. There is a significant strain of thought which is opposed to growth and market mechanisms, based on concerns about their supposed lack of compassion. Such concerns are misplaced. Ultimately the extent of our compassion is limited by the extent of our production. To see this clearly consider the horrific trade-offs which humans were forced to make in various primitive societies. For example when food supplies were low some Inuit villages obliged the elderly to leave in order to secure the survival of those remaining. As noted by philosopher Michael Huemer; the Inuits were using the same moral judgements us, i.e. they believed killing was generally wrong, however it was the reality that there was not enough food being produced to sustain the whole population which compelled them to make highly unpleasant decisions. It was not compassion they were lacking in but production. By extension, in the UK the quality of the treatment we are able to provide to the elderly, disabled and sick is directly dependent on the productive capacity of the economy. It is a counter-intuitive but crucial truth that in the long run a society which prioritises mass production will be able to provide better treatment for the relatively unproductive than a society which makes the treatment of such groups its main focus.

There is a pressing need for economists to move away from monetary and demand side analysis and embrace the task of educating the public about the basic supply side forces which drive UK growth. Given the stakes it will surely be worthwhile.

5 thoughts on “The supply side needs love too”

  1. Posted 31/07/2015 at 18:07 | Permalink

    There is no “war on drugs” in most western countries and this has been the case for decades. The libertarian soft line on illegal drugs (which are illegal as they are dangerous) is contemptible.

  2. Posted 31/07/2015 at 22:41 | Permalink

    Great article Josh, I totally agree that economists should be more engaged with the public, especially in highlighting attitudes which are harmful to society as a whole. I also agree that the supply-side has been ignored over the last few years due to a perceived output gap and that institutions are the key factor in determining the capacity for growth. Something that maybe you could have considered is that although our potential capacity for compassion is far greater now that we don’t have to worry about starvation, we are still a long way from that potential. I do agree that concerns about the lack of compassion of market mechanisms are misplaced, but that doesn’t mean that we can’t do more to relieve the suffering of others through other means, such as favouring policies that have a more favourable redistribute effect over those that solely focus on the final GDP growth figure of the economy.

  3. Posted 01/08/2015 at 19:51 | Permalink

    What supply side measures, particularly in regard to Land has somewhere successful like Singapore enacted. And what lessons could we learn from them?

  4. Posted 03/08/2015 at 19:46 | Permalink

    J Waine – Your ‘dangerous therefore illegal’ argument is flimsy. Motorbikes are dangerous but not illegal. You can advertise, produce and ride motorbikes around with few Government impingements. This is emphatically not the case for illegal drugs. I would encourage you to try and openly sell cocaine or some other drug in the UK and see for yourself the falsity of your statement. Additionally between 2006-2014 the UK Government was using its money and soldiers to (ineffectually) assist the Government of Afghanistan in destroying opium crops. There was shooting. People died. That is a war, a war fuelled by attitudes like yours. Your evident desire to escalate the persecution of those seeking pleasure from chemical substances you dislike fits the definition of ‘contemptible’ better than anything advocated by libertarians.

    Jamie – Thanks for your comment, glad you liked it. I wanted to keep redistributive policies out of the article to try and highlight areas where there is consensus amongst economists about the damage done. Personally I would not favour coercive redistribution because:

    1. I believe these policies create both strong disincentive effects (eg. reduced work by the highly taxed) and distortions (eg. resources flowing in to schemes to reduce tax bills and emigration to lower tax jurisdictions) which damage the productive capacity of economy

    2. I believe coercive redistribution is morally wrong in normal circumstances.

    It is possible that Belief 2 biases me towards Belief 1 though and as this area is more divisive I thought I’d skip it for the article 🙂

    Anonymous – Singapore’s policies in this area are far from ideal yet according to the World Bank in 2010 Singapore had roughly 53% of its total land area classified as ‘Urban’. For the UK this figure is only around 10%. Relaxing building restrictions until we reach a level closer to Singapore would be a very good start!

    Here’s a link to a paper written by Kristain Niemietz in 2012 which goes into much more detail:

  5. Posted 04/08/2015 at 17:33 | Permalink

    Singapore is a city state, so perhaps we should tighten are planning restrictions in London until urban land here falls below 53%? Point is, Singapore has had a thriving economy, and affordable housing as a ratio of discretionary income, compared to all other Countries. With 90% homeownership. Sounds like a success story, yet you say it is far from ideal why?

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