Question about Supply Side Economics/Trickle Down Economics/Horse and Sparrow theory

[wufwugy]

Jimmy's idea regarding demand-side economics gets two main things wrong. Before I explain them, note that economists don't agree with his version.

(1) It is not true that the higher the marginal propensity to consume, the more is "returned to the economy." Examine how banks work and this becomes more than clear. Laborers are employed by producers who get loans derived from bank reserves. People like Warren Buffet play a key role in the laborer's wage by providing bank reserves (among other things). There's a lot more, but no need to get into it.

(2) Consumption is not creation of wealth; production is. Consumption is elimination of wealth because it is turning what was once a resource into less valuable of a resource. Attempting to improve an economy by focusing on increasing consumption is getting the cart before the horse. I'll stop here because nobody yet seems capable of fully explaining what is really going on in the play between production and consumption and other stuff.


I should point out that the demand-side ideas discussed in popular discourse poorly interpret what economists mean when they discuss it. Some economists believe in attempting to boost demand with government policy WHEN in a recession characterized by decreased demand in the private sector. The disagreement that other economists have with this (which is also what my capstone is on) is regarding the hypothesis that reduction in private sector demand is actually caused by dysfunctional monetary policy on part of the central bank.

[wufwugy]

Some economists believe in attempting to boost demand with government policy WHEN in a recession characterized by decreased demand in the private sector. The disagreement that other economists have with this (which is also what my capstone is on) is regarding the hypothesis that reduction in private sector demand is actually caused by dysfunctional monetary policy on part of the central bank.

I should note that this isn't the only disagreement. Other big ones are crowding out and expectations of tax increase. Crowding out is when an increase in government spending pushes up the interest rate and crowds out private investment that would otherwise take place, resulting in meager, null, or negative boost in demand from the increased government spending. The expectations of tax increase is that the private sector adjusts downward their consumption and investment when government increases its expenditures since the private sector expects higher future taxes and thus have perception of decreased wealth, resulting in meager, null, or negative increase in demand from the increased government expenditures.

The crazy thing is that the backbone for why some economists believe that increasing government expenditures during a recession can boost aggregate demand is the equation they choose to use. We don't know if their consumption function reflects reality that well, but they use it nonetheless. I think they use it because of their politics mostly.