SUPPLY-SIDE ECONOMICS

While Adam Smith is considered to be the founder of classical economic theory, he nevertheless incorporated several important concepts from thinking not generally ascribed to the classical school. David Hume's contention that the rate of interest depended on the rate of business profits formed the basis for Smith's interest rate theory, and Hume's quantity of money theory remains a part of economic theory.

Two of the most influential of the first-generation market economists were Adam Smith and David Ricardo. In the formulation of economic theory, Adam Smith was principally concerned with the factors which led to increased wealth in an economy. Smith (131-136) contended that the cost of labor provided the basis for the determination of the value of a commodity. He contended further that it was the relative expenditure of labor that mattered. Smith (131-136) also contended, however, that the factors of supply and demand also affected the actual price levels of commodities in the market place.

Within the framework described in the preceding paragraph, Smith thought that the size of an economy's output should be limited only by the size of markets--or demand. The key element in the process, in Smith's perception, was the accumulation of capital. Smith thought that the accumulation of capital permitted the creation of plant and equipment to assist human labor and the full employment of labor. Smith also thoug

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nvestment as a function of savings (Rees 335). Thus, to stimulate economic growth, neo-classical economists would recommend the implementation of policies designed to stimulate savings. Neo-classical economists view unemployment as a function of economic growth. Thus, actions to promote economic growth, in the view of these economists, would also stimulate employment. Economic growth is viewed by neo-Keynesians as a function of demand. Sluggish growth thus would be countered by fiscal actions to place more money in the economy. Demand stimulation would be recommended, along with decreased taxes, increased governmental spending, or some combination of the two to generate a governmental budget deficit. Monetarist economic policy experienced an ascendancy in the wake of the failure of Keynesian and neo-classical policy makers to adjust to a changing environment ("Monetarism" 23-25). A similar inability to adjust a revered theoretical approach led to monetarism's downfall. The non-monetarist model implies that both domestic inflation and external balance of payments deficits are caused by budget deficits. The appropriate corrective measures, thus, are seen as fiscal reform and real depreciation (Dornbusch 702). The monetaris
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Approximate Pages = 9 (250 words per page)