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Tuesday, March 4, 2008

Say's Law: A Visit to the Supply-side Source
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What do the debates over net neutrality, the economic "stimulus" plan, and the Fed's interest rate-cut binge have in common? And what does this gentleman have to do with any of them?

Net neutrality, tax rebate "stimulus," and endless Fed rate cuts all assume the solution to the economic question at hand is to ration or divvy-up existing capacity rather than create new capacity. With net neutrality, we must fight over a fixed amount of bandwidth and decide who gets how much on what terms. With economic stimulus, we rob Peter to pay Paul in the hope that Paul will spend the money faster than Peter would have and thus avoid an official recession. The same logic goes for the Fed's effort to pump up consumer demand for goods and credit in the short term, even though we know easy money will come back to bite us on the other side in terms of higher prices and distorted asset markets (see, sub prime fiasco). All these efforts focus on manipulating demands and wrangling over a finite supply in the short term, rather than generating new supply over the long term.

Last week, while in Paris to give the keynote speech at the European Fiber-to-the-Home conference, I paid a visit to our friend, the original supply-side economist, Jean-Baptiste Say.

Tomb of Jean-Baptiste Say (1767-1832), Pere Lachaise Cemetary, Paris

Say knew that economies don't grow via the demands of consumers. After all, consumer demand is infinite. Our wants are never-ending. But just because we want something doesn't mean we can have it. No, economies grow through production, via the supply of new and innovative goods and services. Over time, the expansion of our productive and creative capacity transcends the zero-sum battles that define greed and demand. Productive supply is the only path by which we can increase our actual real consumption, or demand, without inflation or confiscation of property. Pumping up demand while neglecting the foundation of supply is a recipe for disaster, whether in tax rebates, monetary "stimulus," or regulation of the Internet.

All our Washington leaders, from Ben Bernanke to Ed Markey, should relearn the central lesson of Jean-Baptiste Say: Supply creates its own demand.

posted by Bret Swanson @ 12:46 PM | Economics

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