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What are the elements of a supply side policy?

Hector McNeill1
SEEL

Because economics makes use of common English words that have a specific significance or meaning in economics, the ability to disseminate information on economics to a wider public faces issues related to how people interpret these commonly used words. This often means that what a person expresses appears to be clear to the speaker but what is conveyed is not what is intended. There are four commonly used terms in the form of Keynesianism, fiscalism, monetarism and supply side that can have different meanings even to economists. Therefore this article is one of four that sets out to define more exactly what is meant by each term. This article is an attempt to define what is meant by supply side.

"If your water system springs a leak you don't call an architect or urban planner because you need a plumber."

"Supply side should be about helping the plumber do an efficient job to the benefit of the customer, and more generally, society a a whole."

"A genuine supply side policy should provide incentives for decisions and corrective actions to be efficient, effective and economic and such decisions and actions have to remain with managers and workforces, not policy planners."
Supply is the production and distribution of goods, services and money. The agents responsible for carrying out the act of "supply" include workforces and corporate management. The means whereby these agents manage production and supply are provided by the assets and resulting cash flow in the form of material and equipment inputs, funds and information.

The ownership of these assets rests with the beneficial owners of a company, including shareholders.

The normal operational objectives of companies are to organize production in such a way that unit costs enable output to be sold at prices that provide a compensatory return on the investment provided by or held by the owners and shareholders of the company. It is therefore self-evident that the supply mechanisms of economic and financial significance are the relationships between the prices of inputs, the production process, the process productivity, the unit costs achieved, the prices of outputs and the volume of output sold, the total revenue and the margin gained in terms of the difference between unit prices of output and unit costs.

"What is called supply side economics is a typical top-down fiscal remedy which provides no practical incentives for workforces and managers to collaborate in enhancing productivity in their mutual interest or in the interests of the consumers (society and the economy as a whole) but rather the outcome is left to the vagaries of "the market" based on decisions that have absolutely no relationship to the policy objectives."

"Supply side needs to be bottom-up to support solutions that are responsive to the context of each company and thereby securing traction by sustaining a genuine participatory approach."
Therefore the "supply side" is made up of a series of determinants of production and its accessibility to consumers, accessibility of unit prices and levels of consumption. From this perspective the lower a company can set its unit prices the levels of consumption are likely to rise. This has the effect of widening the distribution of consumption of a lower-priced product or service and this signifies that more consumers can purchase more of the product or service for a given level of disposable income. The outcome of his particular process is therefore an increase in consumer real incomes.

Supply side dimensions

Here is possible to observe the logic of supply side production in that it is the lowering of unit prices that creates higher levels of consumption. The higher levels of consumption, in this case, have not arisen from increases in nominal income (demand-pull) but rather from reductions in unit prices (supply-push).

Depending on the economic sector, what a production unit needs to do to improve productivity will depend on the technologies and capabilities of personnel employed. Therefore in order to gain traction policies need to be tailored to support the needs of different type of activity. Policies need to provide incentives to:

  • achieve the policy objective
  • to facilitate the achievement of contributions to this objective at company level
  • to facilitate collaboration between the workforce and company owners
  • ensure compensatory output and wages arising from enhanced productivity that is translated into lower unit prices

Therefore supply side policy is very much about balancing the components that contribute to production and real income distribution to the workforce, company ownership and consumers in the form of accessible unit prices.

The elements that need to be balanced are contained in the diagram below.



The supply side policy objective is to maintain or increase real incomes on a sustained basis and with a tolerable equity in distribution. To secure such an operation the level of action of policy instruments has to be at the microeconomic level. If your water system springs a leak you don't call an architect or urban planner because you need a plumber. Supply side should be about helping the plumber do an efficient job to the benefit of the customer, and more generally, society a a whole. A genuine supply side policy should provide incentives for decisions and corrective actions to be efficient, effective and economic and such decisions and actions have to remain with managers and workforces, not policy planners. What is called supply side economics is a typical top-down fiscal remedy which provides no practical incentives for workforces and managers to collaborate in enhancing productivity in their mutual interest. As a result the policy in unable to protect the interests of consumers (society and the economy as a whole) on a sustainable basis. The outcome is left to the vagaries of "the market" based on decisions that have absolutely no relationship to the policy objectives. Supply side needs to be bottom-up to support solutions that are responsive to the context of each company and thereby securing traction by sustaining a genuine participatory approach.

The potential outcomes of this approach to supply side economics is a better distribution of a higher level of real income as shown in the simulations of an early Real Incomes model shown below:




1 Hector McNeill is the director of SEEL-Systems Engineering Economics Lab.


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