Where does stable growth come from? We already know the answer to this question. It is obvious to all that since General Secretary Xi Jinping proposed the supply side structural reform at the end of 2015, the economic measures launched by the government are all from the supply side. Recently, however, there was a voice that the government should focus on expanding demand to prevent the economic downturn. It is necessary to expand demand, but supply side reform cannot be shaken. I wrote this article to explain to readers why stable growth should be based on the supply side.
It is the basic principle of economics that the total supply and demand must be balanced in a country's sustained and stable economic growth. There is no doubt about this. At the beginning of the 19th century, the French economist Sai proposed that supply automatically creates demand (namely Sai's law). The implication is that there will be no general overproduction in the market economy, and the focus of maintaining economic balance is on the supply side. However, unfortunately, in the 1930s, the western economy experienced a major crisis, with the average unemployment rate of more than 25%, so the Say's Law was broken and Keynesianism came into being.
Readers should not be unfamiliar with Keynes, whose representative work is General Theory of Employment Interest and Money. After the publication of this book in 1936, a so-called "Keynesian Revolution" started immediately. The General Theory has three important points: aggregate supply and aggregate demand cannot be automatically balanced (negating "Say's Law"); The general unemployment is caused by insufficient social effective demand; The expansion of employment needs state intervention, and the government should use expansionary fiscal policies to stimulate investment and consumption.
Obviously, the foothold of Keynesian theory is on the demand side. Later, some scholars further expanded Keynesian theory. The reasoning logic is: from the perspective of residents and enterprises, supply side national income=savings+consumption; Demand side national income=investment+consumption. In this way, if total supply and demand are to be balanced, savings must equal investment. If savings cannot be fully converted into investment, the total supply will be greater than the total demand, and production will be surplus, which requires the government to increase public expenditure; If it is still not enough to balance the total supply and demand, then we must expand exports.
I don't know what the readers think, but I don't agree with the above inference. The key point is that the balance between supply and demand that Keynes talked about is only the balance of total quantity. In fact, the balance of supply and demand requires not only the total balance, but also the structural balance. For example, when Marx analyzed the reproduction of total social capital in Capital, he divided social reproduction into two categories: reproduction of means of production and reproduction of means of consumption, and clearly proposed to achieve the balance between "value compensation" and "material compensation". The value compensation is the total balance; The physical compensation is structural balance.
Yes, in terms of stable growth, structural balance is more important than total balance. The structural balance helps to promote the total balance, but the total balance cannot guarantee the structural balance. Why? We may also use the national income determination model for analysis. Keynes said that if only the two sectors of residents and enterprises are considered, the condition of balance between supply and demand is that saving equals investment. What I want to ask about this is that if structural reasons have led to overproduction, wouldn't it be more than a hundred pounds to transform savings into investment?
Some scholars explained that it is not difficult to solve this problem if the two sectors are expanded into three sectors: government, enterprises and residents. For example, we can expand demand by increasing government expenditure and digest excess. I disagree with this explanation. Government expenditure is not a source of water, but also subject to government revenue constraints. Under given conditions, if the government wants to increase income, it can only increase taxes or issue bonds. However, whether the government increases taxes or issues bonds, it is bound to crowd out enterprise investment. With the increase of government investment demand and the decrease of enterprise investment demand, the total social demand may not increase.
Another view is that expanding exports can transfer domestic surplus. Obviously, this is to expand the three sectors to four sectors (namely, to increase the import and export sectors). Yes, the surplus of domestic commodities can be exported, but exports cannot expand domestic demand. You should know that under the conditions of international division of labor, a country's export is for import, and shares the benefits of international division of labor through import and export trade.
From this point of view, a country's steady growth focuses on structural balance; To solve the structural problem, the focus is on the supply side. The facts are the most persuasive. In 1933, Roosevelt took the lead in implementing the New Deal in the United States, followed by other Western countries, and regarded Keynesianism as a national policy. But the result? By the 1970s, these countries had fallen into "stagflation", and none of them was spared.
Western countries fell into "stagflation", and the status of the Keynesian School plummeted. The wall fell and everyone pushed. The monetarist school represented by Friedman claimed to re revolutionize the "Keynesian Revolution"; The Rational Expectation School represented by Lucas asserted that government investment stimulus was ineffective for stabilizing the economy; The supply school emphasizes that the government should shift from expanding demand to reducing tax on the supply side. Yes, in the face of structural contradictions, only expanding demand will not help. From this perspective, Keynesianism has indeed failed.
Since Keynesianism fails, can supply school be used to solve structural problems? As I said, the theoretical proposition of the supply school is tax reduction. After Reagan was elected President in 1981, he sharply cut government spending and reduced personal income tax and corporate income tax according to the theory of the supply school. Although this reduced the cost of enterprises, it also once promoted economic recovery, but ultimately it did not solve the structural contradiction, on the contrary, it further exacerbated the structural imbalance. Today, the shrinking manufacturing industry and the hollowing out of industries are still a major concern of the United States.
In view of this, General Secretary Xi Jinping proposed a Chinese solution to structural problems: supply side structural reform. As the name implies, there are three key words for supply side structural reform. One is structural, that is, the focus is to solve structural problems; The second is the supply side, that is, the reform starts from the supply side; The third is reform, that is, the market mechanism is mainly used to solve structural problems. It can be seen that the supply side structural reform is different from both Keynesian school and supply school.
Finally, a few digressions. After decades of studying economics, I always feel that we used to learn from foreign economic theories but lacked theoretical originality. During academic visits to Europe and the United States in recent years, everyone recognized that "supply side structural reform" is a major theoretical innovation, not only a Chinese solution to stabilize growth, but also a global solution to structural problems. [Author Wang Dongjing is Vice President (Dean) of the Central Party School (National School of Administration)]
