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July 17, 2012

Supply Side Economics

In a village far away and long ago there lived two friends: Og and Gog. Og would spend his time fishing or working on his fishing net, making repairs or some improvements. Gog would often come by to discuss their mutual concerns. One day they got talking about sardines and Gog asked Og to make him a net.

"What are you going to give me for it if I make it for you?" asked Og. "Give you for it? Why should I give you anything for it? You are my friend, make it for me out of friendship" replied Gog. "If I had the idle time, maybe I would but, frankly, I'd rather spend my free time chatting up Mog's darling little daughter. She's cute, isn't she?"

Gog went home to his cave mad and frustrated because he didn't get the net. Over the next few days he thought it over and decided he could give Og a bow and some arrows. Off he went to see Og to offer him the deal: "I'll give you a bow and a dozen arrows for a net" he told Og after they had dispensed with the usual chit chat. "What do I want a bow and arrow set for? I don't hunt. I fish."

Frustrated Gog went home to his cave to think it over. "What can I give that hard hearted Og to get him to give me a darn net?" he asked himself repeatedly. Time went by and Gog said to himself: "The only thing I know how to make are bows and arrows and they are of no use to Og who does not hunt but goes fishing. Could I maybe make a fishing arrow?" He set to work and figured out that the arrow needed to have a string attached so it could be pulled back out of the water. But his usual arrows would pull right out of the fish so he figured a way to add barbs to it.

Satisfied that now he had something to bargain with, Gog set off to meet Og. After the usual pleasantries and an explanation of how the fishing arrow works, Gog made his pitch: "I'll trade you a fishing net for a bow and a dozen fishing arrows!" "You can't catch sardines with that contraption!" responded Og. But this time Gog came prepared to overcome objections. "Of course you'll continue catching sardines with a net but wouldn't you like to catch something more substantial like salmon when they jump out of the water?" This certainly caught Og's attention. Maybe he could trade salmon for favors with Mog's darling daughter. Salmon? Yes, salmon!

Og and Gog made a deal. Og went on to raise a large family of strapping kids well fed on sardines and salmon. Mog gained a diligent son in law. But that is not the moral of the story.

Demand without the ability to pay for it is not economic demand but merely want.

The offer of what is not wanted is not supply. Regular arrows did not close a deal. Gog had to design fishing arrows and invent "creative selling." He created the need for fishing arrows with his story of catching salmon.

Only when one party offers something the other party desires do supply and demand come into existence.

And this is the moral of the story: Gog had to make and supply the fishing arrows before he could demand the fishing net.

Denny Schlesinger


Some people say this story has nothing to do with supply side economics. There are two economic theories that go by the name. The Library of Economics and Liberty (www.econlib.org) has this to say:
The term "supply-side economics" is used in two different but related ways. Some use the term to refer to the fact that production (supply) underlies consumption and living standards. In the long run, our income levels reflect our ability to produce goods and services that people value. Higher income levels and living standards cannot be achieved without expansion in output. Virtually all economists accept this proposition and therefore are "supply siders."
The other supply side economics, the one fiercly defended by conservatives and attacked by liberals follows:
"Supply-side economics" is also used to describe how changes in marginal tax rates influence economic activity. Supply-side economists believe that high marginal tax rates strongly discourage income, output, and the efficiency of resource use. In recent years, this latter use of the term has become the more common of the two and is thus the focus of this article.
Supply-Side Economics by James D. Gwartney

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