# Think Tank > Austrian Economics / Economic Theory >  Is supply-side economics different from Austrian economics?

## CroSpartacus

I'm a little bit confused as to whether Supply-Side economics is different than Austrian economics. I tend to view supply-side as low taxes, less regulation, and letting the economy run its natural course. This guest speaker in my school was in love with Keynes and was constantly bashing supply-side economics saying it caused the gap between rich and poor. Are Hayek and Mises supply-side economists or is there a unique reason why they are simply labeled as Austrian economists?

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## ababba

> I'm a little bit confused as to whether Supply-Side economics is different than Austrian economics. I tend to view supply-side as low taxes, less regulation, and letting the economy run its natural course. This guest speaker in my school was in love with Keynes and was constantly bashing supply-side economics saying it caused the gap between rich and poor. Are Hayek and Mises supply-side economists or is there a unique reason why they are simply labeled as Austrian economists?


Supply side economics is really about the negative incentives that taxes have. They argue that labor taxes reduce labor supply and encourage people to find ways to avoid taxes. This reduces output and implies that tax revenue doesn't increase nearly as much as one would expect (for instance if you increase income taxes by 10%, you might only get 5% more revenue). In the extreme, some supply side economists think that raising taxes will lower revenue, but this is a smaller minority.

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## acptulsa

Yeah, Supply Side is a euphemism for 'Trickle Down'.  Keynesian and Austrian are true schools that go to the heart of economics; this stuff is just a shallow Talking Point.  Could actually apply to either system.

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## Legend1104

Plus supply-side does not equal smaller government. Actually the major goal is to help fund bigger government because it aims at creating more revenues. Austrian economics would like to decrease taxes and spending. Supply-side is just taxes.

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## ClayTrainor

> Austrian economics would like to decrease taxes and spending. Supply-side is just taxes.


Well, ultimately all government spending comes from taxes in one way or another...

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## CroSpartacus

But isn't it also an Austrian economic view that taxing the rich causes less investment for economic growth? I thought Austrian economists believed that reducing taxes for the wealthy would trickle-down to benefit everyone. Is trickle-down economics silent on government spending? If so, then Austrian economics is not to be equated with trickle-down economics.

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## low preference guy

The "Trickle Down" Economics Straw Man
27 September 2001
*Thomas Sowell*




> There has never been any school of economists who believed in a trickle down theory. No such theory can be found in even the most voluminous and learned books on the history of economics. It is a straw man.


Link

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## justinc.1089

The common economic schools of thought are Keynesianism, Monetarist, Supply-Side, and Classical.

Austrian economics falls under Classical best, but differs significantly at the same time for a major reason. Most Classical economists describe the Classical school of thought as theorizing the economy will work best if left alone.

That brings up the question, does left alone mean current government interventions should be removed? This is the stance Austrians take. Or does it mean that everything should be left how it is now, including the current government regulations? That's the position most self-described Classical economists take.

There's also New-Classical or Neo-Classical, or something like that, but I'm not familiar with it. I think it probably amounts to basically the same as Classical anyway.

So I think the Austrian school of thought is VERY similar to the Classical school of thought.


Supply-Side is NOT the same though.

Supply-Side is the only school of thought I really can't remember very well actually. I think its aimed at doing whatever promotes short-term growth in the economy, not just tax policies like some people are mentioning on here.

I will break down the schools of thought as I remember them for you, and if I'm wrong someone else can correct me:


Austrian school of economic thought: The free market will work, so no government intervention or as little as possible is best.

Classical school of economic thought: The economy will correct itself fastest when left alone. So don't change things because that creates problems.

Monetarist school of economic thought: Fiscal policy of government is too imprecise and harsh to effectively manage the economy, but monetary policy can stimulate or slow the economy as is needed.

Supply-Side school of economic thought: Economic policy should be oriented towards short-term, immediate growth. (It might be oriented towards long-term growth. I could swear its short-term, but I'm pretty certain the big thing here is to do whatever gets growth happening, which is why tax is often mentioned along with this, because taxation slows growth).

Keynesian economic school of thought: The government can use fiscal tools to manage the economy. Many people, including even some prominent economists, extend this school of thought to also include government using BOTH fiscal AND monetary policy to manage the economy. So the Monetarist school of economic thought can be thought of as a sub-school under Keynesianism somewhat, much like the Austrian school of thought could be somewhat thought of as a sub-school under Classical in some regards.


Later on I will glance in my economics text book and see how it defines supply-side economics. Its really not too important though because since its goal is producing growth, a supply-side economist will inevitably have to choose an economic action from another school. Supply-side is kind of a fake, pretend school of thought in my opinion because it is not an alternative theory to monetarist, keynes, classical, and austrian.

Monetarist, Keynes, Classical, and Austrian schools all differ in their theory, but supply-side just doesn't really seem to have a genuine theory distinguishing it from these other real schools of thought.

Also, Keynes, Monetarist, Classical, and Austrian can be reduced to just 2 schools of thought like this:

Keynes-Monetarist

Austrian-Classical

The reason is Monetarists and Keynesians agree with each other pretty often, and the theories do not necessarily completely contradict with each other, although they do partially. The same goes for Classical and Austrian too.



I hope that helps to explain the different schools of thought to you.



Btw, I've noticed Austrian economists have a terribly bad habit of ignoring monetarists and classical economists as schools of thought because usually austrian economists only address keynesian economic thought since it is the most opposed to austrian thought, I guess. Or maybe austrian economists think monetarists and classicals aren't really their own schools of thought since both of those are kind of branches of austrian economics and keynesian economics in actuality.

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## WilliamShrugged

Here are some articles on it.

http://mises.org/daily/4132

http://mises.org/econsense/ch10.asp

http://blog.mises.org/8635/supply-si...ore-recession/

Hope this helps....

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## Diurdi

> But isn't it also an Austrian economic view that taxing the rich causes less investment for economic growth? I thought Austrian economists believed that reducing taxes for the wealthy would trickle-down to benefit everyone. Is trickle-down economics silent on government spending? If so, then Austrian economics is not to be equated with trickle-down economics.


 I don't think there's a huge difference for the economy if you tax a total of 1 billion dollars from 1000 millionaires or from 1,000,000 normal workers, except that the millionaires are more prone to move out if the taxation becomes too high.

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## Austrian Econ Disciple

Austrian Economics doesn't like to do anything -- it is a value-free science. I really dislike when adherents preface normative values to the School. Austrian Economics doesn't prescribe any policies, values, or objectives. It's only purpose is to understand the social science of Economics.

Austrian Economics is different than every other School of Economics (at least, orthodox, and modern ones) in methodology. No other school uses praxeology. To the extent we have commonalities with other schools we do so out of coincidence, not out of methodology.

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## William R

> The common economic schools of thought are Keynesianism, Monetarist, Supply-Side, and Classical.
> 
> Austrian economics falls under Classical best, but differs significantly at the same time for a major reason. Most Classical economists describe the Classical school of thought as theorizing the economy will work best if left alone.
> 
> That brings up the question, does left alone mean current government interventions should be removed? This is the stance Austrians take. Or does it mean that everything should be left how it is now, including the current government regulations? That's the position most self-described Classical economists take.
> 
> There's also New-Classical or Neo-Classical, or something like that, but I'm not familiar with it. I think it probably amounts to basically the same as Classical anyway.
> 
> So I think the Austrian school of thought is VERY similar to the Classical school of thought.
> ...


Here's a good description 

Say's Law and
Supply Side Economics


http://www.friesian.com/sayslaw.htm

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## justinc.1089

> Here's a good description 
> 
> Say's Law and
> Supply Side Economics
> 
> 
> http://www.friesian.com/sayslaw.htm


Thanks I will take a look at that later.

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## TheBlackPeterSchiff

I always looked at supply side economics as stimulate the rich (with tax breaks and corporate welfare) and hopefully a little somethin will trickle down to the poor.

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## Epic

"supply side economics" has no meaning now because some people think it means one thing, other people think it means something else.

But it's not a "school" like Austrian Economics is.

At it's best, supply-side economics is just the insight that low taxes serve as a strong incentive for increased production, and many times overall tax collections will increase when tax rates decline.

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## StilesBC

Reviewing this always helps: 

http://www.econlib.org/library/Enc/A...Economics.html

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## stuntman stoll

Not answering the question, but something related... A few days ago I heard some "conservative" economist on a talk show saying that some major supply sider (I think Art Laffer) hypothesized that a flat tax of 17 percent is optimal because that's where the moderate tax rate and larger incentives to produce converge to give the governent the most revenue.  This is completely ass backwards morally.  If anything we should be strangling the parasite of government.  Make the government deal with a 5 percent income tax, or no income tax, or better yet abolish government altogether.

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## StilesBC

> Not answering the question, but something related... A few days ago I heard some "conservative" economist on a talk show saying that some major supply sider (I think Art Laffer) hypothesized that a flat tax of 17 percent is optimal because that's where the moderate tax rate and larger incentives to produce converge to give the governent the most revenue.  This is completely ass backwards morally.  If anything we should be strangling the parasite of government.  Make the government deal with a 5 percent income tax, or no income tax, or better yet abolish government altogether.


Ethics isn't even the primary reason why Laffer's suggestion is ass-backward.  It's the logic he uses to get there.  He's using mathematical equations, full of assumptions to reach these conclusions.  The chance that Laffer is so smart as to have taken every possible variable into consideration is nil.  We don't even fully understand all of the variables that comprise economic activity.  And the way each variable interacts with others changes all the time.  Moreover, even if we did understand all of these variables, the largest assumption is that the end goal of finding this "magic rate of taxation" is to raise GDP.  But who does that help?  Everyone equally?  No.  So his suggestion, by definition, helps some and hurts others.  Perhaps it results in an even greater skewing of the service economy at the expense of manufacturing.  Is this a wash?  Of course not.  GDP may rise, but with an unsustainable composition that requires an even larger correction than allowing a contraction (by cutting the G [gov't] portion of G+C+I=P equation).  

The idea that we can know the "ideal" rate of taxation is positively ludicrous.

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## stuntman stoll

> Ethics isn't even the primary reason why Laffer's suggestion is ass-backward.  It's the logic he uses to get there.  He's using mathematical equations, full of assumptions to reach these conclusions.  The chance that Laffer is so smart as to have taken every possible variable into consideration is nil.  We don't even fully understand all of the variables that comprise economic activity.  And the way each variable interacts with others changes all the time.  Moreover, even if we did understand all of these variables, the largest assumption is that the end goal of finding this "magic rate of taxation" is to raise GDP.  But who does that help?  Everyone equally?  No.  So his suggestion, by definition, helps some and hurts others.  Perhaps it results in an even greater skewing of the service economy at the expense of manufacturing.  Is this a wash?  Of course not.  GDP may rise, but with an unsustainable composition that requires an even larger correction than allowing a contraction (by cutting the G [gov't] portion of G+C+I=P equation).  
> 
> The idea that we can know the "ideal" rate of taxation is positively ludicrous.


You're right, but we're addressing 2 different aspects.  You're right in saying that to accurately know how changes in variables affects the macro economy, you would have to know how the changes in variables affects every different person and their incentives in their own little micro economy, and add it all up.  That would be an act of hubris.  However, you can make general logical assumptions, such as: raising income tax rates reduces the incentive to produce and vice versa, and: the tax revenue will be $0 at 0% and $0 at 100%.  That would mean there there is a "laffer" curve from rates of 0% to 100% but it would be impossible to know the exact shape or where the tax rates would be placed on the curve with out a time machine or at least 10 identical economies to tinker with.

What I was saying is that the optimal tax rate is NOT at the top of the "laffer" curve where the government gets the most money, but at 0%.

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