Supply Side Economics Part 1: Why it is Incorrect

On this blog, I frequently write about topics I'm not formally educated in, but nevertheless interest me. Despite being formally trained in economics at the graduate level, I try to avoid talking about it with non-economists. This is partially because most non-economists literally have no idea how economists think of "the economy" so there is a massive conceptual gap between myself and the interlocutor, and also because it's a highly politicized topic. Words like "capitalism" and "communism" are thrown aronud without any consideration as to what they even mean, and frequently invoke yelling matches. Even something as simple as the word "economy" is crucially misunderstood by 99% of the population. But this growing fetishization with "supply-side economics" is truly driving me insane. In my eyes, its just about equivalent to taking the climate change skepticism stance, or perhaps flat earth. Very often, someone espousing supply-side economics will atually take those aforementioned stances. I've been puzzled as to why this still proliferates despite decades of economic research showing it's absurdity, untill recently, when i've experienced somewhat of an epiphany, and think the cause can be explained. Prior to that investigation, I want to first explain what supply-side economics is from a theoretical perspective, show how it rests on highly dubious assumptions, discuss its empirical failings, and explore its unintended n-th order negative effects.

A Very High Level Critique

If you strip away the op-eds and think-tank branding, the doctrine is roughly (and what it means in formal macro terms):

1. High marginal tax rates on labor and capital reduce effort, investment, and entrepreneurship – so cutting them will materially increase labor supply, risk-taking, and capital formation. (Econlib)
   • A representative or small-number agent structure with very high Frisch and Marshallian elasticities for labor at the top end.
   • Highly elastic taxable income (ETI) with respect to marginal tax rates, especially for the rich.
2. The Laffer curve: at sufficiently high rates, cuts raise revenue; even at moderate rates, the revenue hit is small relative to the growth benefit. (Wikipedia)
   • Government’s objective function ≈ maximize GDP and/or tax revenue with almost no weight on distribution, public goods, or risk.
   • The curve is convex, smooth, and has a maxima; and we only need to consider one decision variable.
3. Crowding-in of private investment if tax cuts are paired with spending restraint, under the claim that lower expected future tax burdens and deregulation raise the after-tax return to capital.
   • Without government spending, the economy will naturally operate at full capacity without output gaps. Potential GDP is equivalent to actual GDP under laissez fair conditions.
4. Trickle-down distribution: boosting after-tax income of high-income households and corporations is supposed to raise aggregate investment and long-run productivity, benefiting workers via higher wages.
   • Investment that is strongly sensitive to user cost and not much constrained by demand conditions or financial frictions.

Each of those is contestable and far from the consensus among economists. Lets discuss why:

1. The Laffer curve exists but is trivial and vacuous: As a mathematical object, the Laffer curve is trivial; revenue is zero at 0% and 100% (under the strong assumption that nobody works at a 100% marginal rate), so some interior maximum exists. (Wikipedia) The problems is the Shape and location of the curve is entirely empirical. In practice, even fairly conservative empirical work on the high-income Laffer curve puts the revenue-maximizing top rate substantially above actual top rates in the US and other advanced economies (e.g. Goolsbee on high-income Laffer curve). (Brookings). It also mischaracterizes the governments objective: maximizing tax revenue isn’t the government’s welfare problem. Optimal tax theory à la Mirrlees cares about social welfare under asymmetric information, not revenue alone. Feeding “Laffer curve” into public debate as if “to the right of the peak” is self-evident ignores distribution, externalities, and public goods. So yes, there is a Laffer curve; the political claim that we’re usually on the wrong side of it is the part that’s not supported.

2. Labor supply and taxable income elasticities: Supply-side narratives assume large labor supply response to marginal rates at the top. But empirically, hours worked for prime-age workers are not very elastic with respect to marginal rates; lots of meta-estimates put Frisch elasticities well below 1 for most groups. This means workers do not change their hours worked in response to tax changes. High ETI at the top is often avoidance and shifting, not real activity (e.g. shifting between corporate and personal tax bases, timing income to exploit rate changes). Studies that dig into this usually find that once you net out avoidance and base changes, the real-activity elasticity is smaller. (Brookings) So the core behavioral channel – “cut rates → people work much more → GDP booms” – is theoretically filtered through constraints (contracts, social norms, institutional features of labor markets) that the canonical supply-side story simply ignores.

3. Investment behavior and corporate finance: Textbook supply-side assumes that Lower corporate and capital-income taxes → higher after-tax return → big jump in physical investment and innovation. But that treats corporations as if they are always constrained by the user cost of capital, not by demand, market structure, or internal financing behavior. This ignores agency and rents: when firms have market power and entrenched management, extra after-tax cash often goes to share buybacks, dividends, and M&A rather than net new capital formation. The modern corporate-finance view is that what matters is: Expected demand / market size, Risk and irreversibility of investment, Market power and rent extraction, and Financial constraints and corporate governance. Tax is one term in the user cost, but not obviously the dominant one in a world with slack demand, cheap credit, and high intangible capital intensity. The supply-side model is basically a neoclassical investment model bolted directly into politics.

4. Oversimplified macro structure: The supply-side narrative is usually one-sector, representative agent, no financial sector, no involuntary unemployment. That leads to underplaying demand-side constraints: if you’re at or below potential output because of deficient demand, cutting top tax rates does little for current output compared with e.g. transfers or public investment. It also ends in neglecting public goods and human capital: cutting taxes financed by lower public investment (infrastructure, education, R&D) can reduce long-run supply, even if private investment rises a bit. It treats the government’s intertemporal budget constraint as if deficit → inevitably lower future growth, while simultaneously claiming tax cuts will “pay for themselves” via growth. That’s an internal inconsistency.

5. Narrative / quasi-experimental tax literature: Romer & Romer (2010) use narrative identification of exogenous tax changes in the US (post-war). They find that an exogenous tax increase of 1% of GDP reduces output by about 3% over three years – i.e. tax increases are contractionary, but not in a way that implies that rates are above the Laffer peak. (Econometrics Laboratory) Symmetrically, tax cuts can be expansionary if exogenous – but they don’t “pay for themselves”; revenue falls. Mertens & Ravn (2013) distinguish personal vs corporate tax changes. They find personal income tax cuts can have a measurable positive effect on GDP (in their baseline, a 1 p.p. cut in the average personal income tax rate raises GDP per capita by ~1.4% on impact), and corporate tax cuts also have effects, but again, not self-financing. (American Economic Association) So the best empirical work says: “Yes, there is a growth effect of tax changes, but it’s moderate and does not save you from arithmetic.”

6. Revenue and the “tax cuts pay for themselves” claim: Studies of US tax reforms over decades (e.g. Goolsbee on high-income Laffer curve) show revenue losses from top rate cuts; even at the very top, we are not typically on the right-hand side of the Laffer curve. (Brookings) Romer & Romer (2009/2010) and follow-ups find no evidence that tax cuts reduce government size; in fact, there’s some evidence that tax cuts are followed by higher spending (“starve the beast” doesn’t work empirically). (IDEAS/RePEc) So empirically, the combination “cut taxes → big growth → higher revenues → smaller government debt” is simply not what we see in the data.

7. Growth and the broader tax-growth literature: Survey work looking across many studies finds there is some evidence that very high marginal rates are bad for growth; but within the range of rates actually observed in advanced economies, growth effects of rate changes are modest and depend heavily on design (base broadening, composition of taxes, financing). (Brookings) And crucially, if tax cuts are deficit-financed and not matched by spending cuts, the resulting larger deficits can lower long-run growth via reduced national saving and higher interest rates. (Brookings) So even where supply-side effects exist, they get washed through the fiscal arithmetic and general equilibrium, often leaving you with: Slightly higher output for a while, Higher inequality, Higher debt; which is not what the marketing brochure promised.

Supply-side economics is often framed within the broader austerity playbook, which is actually how it gets implemented in practice: tax cuts for capital + spending cuts elsewhere. This policy framework has been incredibly destructive, and more often then not leads to significant adverse consequences without acheiving its intended goals.

1. Output effects of fiscal consolidations: IMF and related work on fiscal consolidations finds Fiscal consolidations (austerity) are on average contractionary in the short- to medium-run. Composition matters; spending cuts tend to have larger negative output effects than tax increases; some recent work emphasizes that base-broadening is less damaging than rate hikes. (ScienceDirect). So the classic supply-side package (cut top marginal rates + cut spending), from this literature, is short-run contractionary, with uncertain long-run growth benefits and clear distributional consequences.

2. Inequality: in the empirical record, several IMF and related papers document that fiscal consolidations raise income inequality, especially when they are spending-based. (IMF). Recent work continues to find that austerity tends to increase inequality, particularly when measures are unannounced or regressive. (ScienceDirect). When you overlay regressive tax cuts on top of spending cuts you increase post-tax, post-transfer inequality via both the tax and the spending side. You may also increase wealth inequality as capital-heavy households disproportionately benefit and use extra income for asset accumulation, not real investment in new capacity.

Corporations simply do not reinvest the money into new products, they purchase assets. This is very much in line with post-2000s data. Large tax cuts that raise after-tax corporate profits have often been followed by large increases in share buybacks and dividends, with modest movement in net investment relative to trend. This is consistent with a world of abundant savings, low interest rates, high market power, and weak demand: the marginal project doesn’t suddenly become attractive; instead, shareholders get a transfer. The standard neoclassical model used by supply-side advocates effectively assumes perfect capital markets, no corporate governance or agency problems and firms price-taking in output markets. In the actual world of oligopolistic markets and financialized corporations, the “tax cut → K↑” link is fragile.

I also think endogenous instability and macro-risk is a real concern conceptually; something that heterodox economists are really starting to make apparent.

1. Higher inequality → higher propensity to save at the top → demand shortfalls, unless offset by credit expansion or public deficits. That can increase the likelihood of debt-driven cycles or secular stagnation.
2. Weaker automatic stabilizers: if cuts are focused on progressive taxation and social spending, the tax-transfer system smooths shocks less, making output more volatile.
3. Higher public debt from persistent revenue shortfalls when tax cuts don’t pay for themselves. When political constraints then force consolidations in bad times, you get pro-cyclical policy and more macro instability.

There’s a growing policy discussion (even at institutions like the IMF) about how inequality and weak social safety nets can undermine growth and stability, which sits awkwardly next to the old-school supply-side political agenda. (The Guardian)

If you treat "supply side economics" like a research hypothesis and not an ideology, the distilled take is:

• Narrow, careful supply-side reforms (e.g. removing distortionary tax expenditures, broadening bases, targeted investment credits, well-designed EITC-style incentives) can have positive efficiency effects.
• Broad, regressive tax cuts branded as “supply-side economics” generally:
• Reduce revenue and raise deficits
• Have at best moderate effects on growth
• Do not pay for themselves
• Increase income and wealth inequality
• Often coincide with or justify spending cuts that hurt long-run productive capacity (education, health, public investment) and amplify instability.

There are a few more layers of critique that people often leave implicit, having to do with: political-economy / rent-seeking channels, cross-border externalities (tax competition), institutional / administrative side-effects, macro-financial distortions. We will look at some concrete episode-level failures and what they suggest

1. Political economy & rent-seeking: Tax cuts as rent multipliers. If you think in a Tullock/Krueger/Mazzucato rent-economy way, supply-side packages are not neutral tweaks to a benevolent planner’s tax function; they change the payoff to rent-seeking. Supply-side reforms don’t just fail to boost growth; they structurally reorient the economy toward rent-seeking activities with high private return and low social value, via these mechanisms:

   • Higher after-tax rents → more lobbying to protect / extend those rents.: When top rates and capital taxes are low, a given pre-tax rent (market power, regulatory privilege, IP, etc.) translates into a bigger post-tax stream, increasing the private return to lobbying. That’s just a wedge on the rent-seeking FOC.

   • The nature of supply-side tax reform itself is rent-rich. The actual bills are full of: targeted deductions, accelerated depreciation, “special regimes”, sector-specific relief (energy, real estate, finance), complex pass-through rules. That complexity creates new margins for rent extraction by well-connected sectors and firms. You get an entire industry of legal/accounting arbitrage whose social product is… moving income around tax boxes.

   • Over time you get a rent-heavy growth model. Work like Mazzucato’s on modern economic rents documents how returns increasingly come from IP monopolies, financial intermediation, and regulatory privilege rather than productivity per se. (OUP Academic) A tax code that is systematically kinder to capital income, IP income, and capital gains amplifies that pattern.

2. Tax competition & the “race to the bottom” externality: At the national level, classical supply-side rhetoric acts as if each country is a closed system. In reality Capital is mobile; public goods are local. Cutting corporate and top rates to attract investment creates cross-border externalities: other jurisdictions are pressured to match cuts or see their tax base eroded. Empirically, we do see a partial “race to the bottom”. Corporate rates in advanced and developing economies have trended down for decades; IMF work calls this a “partial race to the bottom,” with countries pressured to lower rates for fear of losing investment. (IMF) That has been accompanied by intense tax competition and the growth of tax havens and BEPS strategies. The kicker is that the investment response is often weak and heavily compositional: a lot of what moves is paper profits and mailbox entities, not factories or R&D labs. (Tax Justice Network) So from a global planner perspective, this is textbook inefficient competition: jurisdictions under-tax mobile capital, over-tax immobile labor/consumption, and under-invest in public goods. The canonical supply-side story is silent on this externality.

3. Erosion of tax morale & institutional capacity: Another under-discussed second-order effect

   • Perceived unfairness → lower tax morale.: OECD work on “tax morale” shows that perceptions of equity in tax systems are important for voluntary compliance and support for the state. When the observable thrust of policy is “Cut taxes for corporations and the very rich; offset with consumption taxes or spending cuts,” that visibly regressive tilt tends to erode trust and compliance. (OECD)

   • Starving the state → weaker enforcement, regulation, and data.: Chronic revenue loss and an anti-state narrative eventually underfund tax authorities and regulators, undercut their ability to police evasion, financial risk, and corporate misconduct and degrade the quality of public data and analytical capacity. That’s not just “smaller government”; it’s less competent government, which can reduce growth by allowing more rents, more crises, and weaker public investment.

   • Fiscal consolidations that aim to fix the deficit can paradoxically depress revenue.: Recent IMF work finds that spending-based consolidations often lead to lower revenue levels in the medium run (not just in the short run), partly by weakening growth. (IMF) So the idea that “we’ll cut taxes, growth will boom, and then we can trim the fat” is empirically dubious; the sequence can end up as “cut taxes → weaken capacity → forced austerity → weaker growth → structurally lower revenue.”

4. Distortions in organizational form and tax arbitrage: Once you move away from a representative agent and remember the income taxonomy in the code, another negative channel shows up:

   • Strong incentives to relabel labor income as capital or business income.: Preferential rates on dividends, capital gains, and pass-through business income encourage high earners to incorporate, shift into partnerships, or otherwise reclassify labor income. Kansas is instructive: exempting pass-through income led to a big rise in pass-through entities and a collapse in revenues, without measurable gains in output, employment, or new firm formation relative to neighbors. (Center on Budget and Policy Priorities)

   • Explosion of tax-motivated entity forms.: In the US and elsewhere, you see a rapid rise in LLPs, S-corps, private equity and real-estate vehicles whose structure is driven at least partly by tax code arbitrage. From a welfare standpoint, that’s pure resource misallocation into avoidance infrastructure.

   • Administrative complexity as a deadweight loss.: The more the supply-side reforms add special regimes, phase-outs, and targeted incentives, the more they raise compliance costs, create cliffs and kinks in effective marginal rates, and shift high-skilled human capital into tax engineering rather than productive activities. This is conceptually distinct from the simple “ETI” story: a lot of the measured taxable-income elasticity is this kind of shifting.

5. Macro-financial distortions, leverage, asset bubbles, and financialisation: Aother critique is that supply-side packages, as implemented, push the economy toward higher leverage and asset inflation, which increases fragility and does little for the real capital stock.

   • Debt bias: Standard corporate tax codes let interest be deducted but not normal returns to equity. That’s a robust “debt bias” that encourages higher leverage. IMF and related work documents that tax systems around the world push firms toward debt above what they would otherwise choose. (IMF) Combine low rates, generous interest deductibility, and lower taxes on capital income, and you amplify leveraged real-estate booms, LBOs and financial engineering, and fragile corporate balance sheets.

   • Financialisation of corporate behavior: Empirically after the 2017 TCJA in the US only about 20% of the incremental cash outflow from S&P 500 firms went to capex or R&D; the rest went to buybacks, dividends, and similar uses. (IMF) Academic work finds significant increases in payouts post-TCJA, consistent with the stock market’s interpretation of the law as a transfer to shareholders rather than an investment shock. (ScienceDirect) This dovetails with post-Keynesian and structuralist work on “financialisation of the firm,” where higher profitability and tax advantages show up as higher payouts and asset prices, not real capital formation. (White Rose Research Online)

6. Long-run public capacity, inequality, and growth: The “second order” here is: you’re not just shifting the distribution at a point in time, you’re changing the political economy of future policymaking in favor of top groups, which can lock in a low-public-investment, high-inequality equilibrium.

   • Public capital vs. private capital: When tax cuts are financed (eventually) by cuts to public investment, you’re swapping one type of capital for another. There’s decent evidence that infrastructure, education and early childhood programs, and basic research have high social rates of return, potentially higher than marginal private investment, especially in already capital-rich economies. Slashing these to “make room” for rate cuts is plausibly growth-reducing.

   • Inequality as a drag on growth: Work at the IMF, OECD, and others has argued that high income and wealth inequality can weaken growth via underinvestment in human capital, political capture, and demand weakness. (OECD) There is evidence that top-rate cuts are associated with rising top-income shares and Gini coefficients in OECD countries. (OECD) Combine that with the consolidation literature (spending-based austerity raising inequality), and the full package looks especially bad for inclusive growth. (IMF eLibrary)

7. Dynamic instability: inequality, demand, and policy cycles

   • High inequality + incomplete markets → chronic demand deficiency (secular stagnation flavor), unless offset by rising private leverage, or chronic government deficits. If the political system insists on eventually doing austerity to correct those deficits, you get stop-go cycles: tax cuts + loose financial conditions → asset boom, rising leverage, higher inequality, leading to a crisis or fiscal scare → consolidation (mostly spending cuts) → output hit and more inequality. Then rinse, repeat. Meanwhile, as inequality rises, political support for further regressive tax relief can actually increase (median voter captured; campaign finance, media power), reinforcing the cycle.

Two last things that often get glossed over:

1. Objective function mismatch: The implicit objective in political supply-side rhetoric is “maximize GDP subject to not exploding the debt.” But in standard welfare economics, the relevant object is some distribution-weighted welfare integral that includes marginal utility of income (declining), risk, externalities, and non-market goods. Once you admit that, it’s entirely possible for a policy that slightly raises GDP but massively raises inequality and risk to be welfare-reducing, even aside from any debt issues.

2. Sectoral and environmental externalities: Many supply-side packages lower effective tax rates on fossil fuels, real estate, and resource extraction relative to their external social costs. That is, they can be explicitly anti-Pigouvian, exacerbating long-run climate and environmental risk.

Supply Side Economics Misconceptualizes what a Market is

Economists use “market” in a few overlapping ways—ranging from a concrete trading venue to a highly abstract coordination mechanism in a model. The differences matter because many big debates in economics are really debates about which concept of market you’re using.

1. Market as an exchange setting with prices: In introductory microeconomics, a market is the set of buyers and sellers whose interactions determine prices and quantities (even if they never meet physically). In more formal micro theory, a “market economy” is a setting where goods/services are available for purchase/trade at known prices (i.e., well-defined rates of exchange). (hawkinqian.com)

2. Market as an equilibrium allocation mechanism: In general equilibrium theory (Walras/Arrow–Debreu), a market is conceived as a system of prices for a (very carefully defined) list of “commodities,” and an equilibrium is a vector of prices such that aggregate supply equals aggregate demand across all those commodities. Importantly, “commodities” can be indexed by time, place, and state of the world—so uncertainty and timing become part of what “the market” is. (Wikipedia)

3. Market as an information-and-incentives system: A Hayekian conception emphasizes markets as a discovery/communication process: prices convey dispersed information and help coordinate plans without any single planner knowing everything. (Econlib)

4. Market as an institution (rules + enforcement): Institutional and political economy traditions stress that markets don’t run on prices alone—they require property rights, contract enforcement, norms, and organizations. North’s “institutions are the rules of the game” frame is central here. (American Economic Association)

5. Market as a governance structure among alternatives: Coase (and later transaction-cost economics) treats “market” as one governance mode among others (notably firms/hierarchies). Markets are not free to use: contracting, bargaining, monitoring, and enforcing agreements can be costly, and those costs help explain when activity happens “inside firms” instead of “through markets.” (rochelleterman.com)

6. Market as socially embedded (not separable from society): Economic sociology and some political economy argue that market exchange is embedded in social relationships and networks, and that trying to analyze markets as purely price-mediated can miss how trust, identity, and power shape who trades with whom and on what terms (Granovetter), and how “self-regulating markets” are historically constructed and politically maintained (Polanyi). (UW Faculty)

7. Market as engineered design: “Market design” treats markets as designed mechanisms (auctions, matching systems, kidney exchange, school choice). The key idea is that rules and constraints (including moral constraints) shape outcomes; some exchanges are “repugnant,” so market-like allocation must be achieved without simple buying/selling. (American Economic Association)

8. Herbert Simon - markets as contractual exchange networks and a coordination device: In “Organizations and Markets” (1991), Simon repeatedly frames a market economy as a landscape of organizations connected by market transactions—and he treats “market” as a governance/coordination mode distinguished from authority inside organizations. Simon emphasizes limits—prices coordinate well when they’re known/predictable, and when situations get complex or uncertain, other coordination mechanisms (often organizational procedures, rules, quantity adjustments) can dominate. (Organizations and Markets)

9. Brian Arthur - markets as complex adaptive, out-of-equilibrium processes (especially expectations-driven): a market is an adaptive, evolving system of interacting agents, often far from equilibrium, where expectations and feedback matter. In “Complexity in Economic and Financial Markets” (1995), he argues that markets—especially financial markets—are shaped by an ecology of co-evolving expectations: agents’ beliefs generate actions that feed back into the market outcomes they then revise beliefs about, producing potentially complex, non-stationary behavior. (Complexity in Economic and Financial Markets) On his Santa Fe Institute page, he defines complexity economics around agents constantly adjusting their “market moves” (buying decisions, prices, forecasts) in response to the aggregate patterns they jointly create—i.e., a feedback system rather than a clean equilibrium machine. (Complexity Economics)

10. Leigh Tesfatsion: explicitly describes decentralized market economies as complex adaptive systems with many adaptive agents interacting locally and generating macro-level regularities that feed back into micro behavior. (Complex Adaptive Systems)

Much disagreement about economicu policy reduces to major disagreements about how to understand markets.

1. Equilibrium idealization vs market-as-process: Neoclassical GE often models markets as if they “clear” via prices (equilibrium as benchmark). (Wikipedia) Austrian / Hayekian views emphasize markets as an ongoing discovery process under dispersed knowledge, with coordination as something achieved (imperfectly) over time. (Econlib)

2. “Markets are efficient” vs “market failures are pervasive”: The welfare theorems say competitive equilibria can be Pareto efficient under strong assumptions. Information economics argues that once you admit imperfect information and incomplete markets, inefficiency is not exceptional; it’s a default possibility (Stiglitz) and adverse selection can unravel trade (Akerlof). (NBER)

3. Are markets natural/spontaneous, or politically constructed?: One tradition treats markets as emergent from voluntary exchange plus basic rules. Another (Polanyi and many political economists) stresses that “market society” requires extensive legal and state construction (property regimes, labor commodification, monetary systems), and that markets are inseparable from political struggle. (Wikipedia)

4. Where do markets end and organizations begin?: If “market” just means voluntary exchange, why do firms exist at all? Coase’s answer: because using the price system has costs; firms/other hierarchies can sometimes economize on transaction costs. (rochelleterman.com)

5. Rational, disciplined actors vs psychologically realistic actors: Many models assume agents are (approximately) rational and arbitrage eliminates big errors. Behavioral economics/finance argues systematic biases and “limits to arbitrage” can matter in real markets; e.g., the behavioral finance literature builds on prospect theory and constraints on arbitrage. (Massachusetts Institute of Technology)

6. Price-taking coordination vs power, inequality, and social embeddedness: Standard competitive models downplay power (everyone is a price-taker) and treat preferences/constraints as given. Sociological and institutional approaches emphasize networks, norms, trust, and bargaining power as constitutive of how markets actually function. (UW Faculty)

7. What should be for sale?: Even if a market could allocate something efficiently, societies may reject commodification on moral grounds; market design work treats “repugnance” and legality as real constraints, not afterthoughts. (American Economic Association)

Okay so why is any of this relevant? Well, when you make assumptions, or commit to certain conceptualizations of your units of analysis, or the basic ontology of your system certain conclusions necessarily follow. Many supply-side laissez fair economists see "markets" as a somewhat platonic object; meaning, something that exists in isolation from space, time, culture, context, and history. It's somewhat of a faith commitment (this is not a coincidence, I'll elaborate on this later), that ignores about a century worth of economic research strongly indicating markets are deeply embedded within broader systems such as society and ecosystems. The ten "definitions" I introduced above are by no means exhaustive or mutually exclusive. I see these these as overlapping, but I take the firm stance that markets are inseperable from society. I've alluded to this in prior blog posts, but now I'll explain it a bit more. I'll essentially be describing the Polanyi / institutional-econ deconstruction of “pure market” mythology — which is exactly where a lot of critiques of supply-side really ought to start.

Markets are made, not found. Historically, economies were embedded in social relations, and what we now call “the market economy” is a relatively recent joint invention of state + law + social norms, not some natural baseline that exists in the wild. (Wikipedia) Polanyi’s famous move is basically: “laissez-faire was planned” – you needed a powerful state to create national labor markets, enforce commodification of land, standardize money, enforce contracts, and suppress alternative arrangements. (Wikipedia) Modern institutional work (Rodrik, North, etc.) is the same point in more formal language. Growth and functioning markets depend on property rights, rule of law, contract enforcement, regulation of finance and corporate behavior, basic social insurance – all of which are institutional choices. (ifo Institut) Rodrik’s summary line: states and markets are complementary institutions, not substitutes; you don’t get well-functioning markets without effective states. (Project Syndicate) The relevant “object” is not “markets vs government” but a specific market–state configuration.

The supply-side / neoliberal frame quietly assumes: Baseline = self-regulating competitive markets AND Government = something that intervenes and distorts. But if markets only exist as equilibria of a particular legal–institutional game, that decomposition is wrong. The state is not “intervening in markets”; it is choosing which markets exist, and on what terms.

A few concrete mischaracterizations:

1. Competition isn’t automatic: Without antitrust, merger control, entry rules, and limits on predatory behavior, you don’t converge to a nice atomistic-competition world. You converge to dominant-firm oligopoly plus regulatory capture. Treating competition policy as “distortionary” regulation rather than the thing that makes the textbook competitive model remotely relevant is backwards.

2. Property rights are not neutral: How you define IP, land rights, corporate governance, bankruptcy, etc. is already a set of “interventions” that distribute power and income. The supply-side story pretends those deep choices are given and neutral, then focuses moral outrage on marginal tax rates.

3. Information and transparency are public goods: Securities law, accounting standards, disclosure rules, consumer protection, FOIA, labor standards that mandate record-keeping – all of that is infrastructure for markets. Strip too much of it away and you don’t get more “freedom”; you get fraud, adverse selection, and unraveling markets.

Once you see all that, the slogan “government should just get out of the way and let markets work” is literally incoherent. There is no such thing as “letting markets work” without a heavy prior specification of the rules of the game. You can think of market regulations as enabling constraints. These are rules, boundaries, or conditions that limit action in a way that stimulates creativity, innovation, and novel solutions, rather than restricting them. They act like guardrails, providing focus and structure (e.g., a deadline, budget, or limited resources) that forces adaptation, collaboration, and new approaches, leading to better outcomes in complex systems. In econ-speak, a lot of regulation is mechanism design / market design: rules that constrain individual strategies in order to expand the set of desirable equilibria (e.g. deep, liquid, non-fraudulent financial markets; labor markets that aren’t literal sweatshops; product markets where buyers can trust quality claims). Think of minimum standards (safety, quality, labor) mandatory disclosure, and clearing, capital, and margin rules in finance; These are conceptually like the constraints in a VCG mechanism or a well-designed auction: you restrict what agents can do in order to make the game implement something closer to the desired allocation. The supply-side frame tends to lump all of this under “red tape” and treat the absence of constraints as “the free market.” But in real-world equilibrium terms: No constraints ⇒ more scope for fraud, monopsony, predation, collusion ⇒ less allocative efficiency and less alignment with consumer preferences. So yes: good regulation is literally what makes markets more like the idealized competitive model, not less.

Once you bring the institutional/constitutive role of the state back in, a few extra critiques land squarely on supply-side doctrine:

1. Deregulation ≠ neutral efficiency move: In practice, “deregulation” almost always means re-regulation tilted toward specific interests (e.g. financial deregulation pre-2008, energy/telecom deregulation that allowed consolidation and rent extraction). If you start from the wrong baseline (“markets are fine unless the state meddles”), you systematically ignore who gains control over the rules once formal checks are stripped away.

2. Monopoly and markups aren’t accidents: The last few decades show rising markups and concentration in many sectors, linked to IP, network effects, and weak competition policy. (PIIE) A supply-side stance that focuses on tax cuts while being relaxed about market power is self-contradictory: you end up subsidizing monopoly rents, not competitive returns.

3. Labor markets need rules to even approximate “choice”: Without labor law (collective bargaining rights, safety, anti-discrimination, minimum standards), “participation” in the labor market is closer to coerced acceptance of whatever big employers offer. Slashing those protections in the name of “flexibility” might move you numerically closer to the textbook institutional description (weaker unions, fewer rigidities), but farther from its behavioral assumptions (informed, unconstrained choice among many employers).

4. Fiscal and social insurance institutions stabilize markets: Automatic stabilizers, unemployment insurance, deposit insurance, lender of last resort, etc. are institutional devices that keep private balance sheets from imploding in downturns. The supply-side / austerity instinct to shrink these “distortions” can make markets more crisis-prone and fragile – the opposite of a healthy supply side.

The supply-side story is built on a fairy-tale market that only exists when the very regulations it attacks are present. It tries to reap the narratives of the competitive model while eroding the institutional preconditions that make that model a decent approximation.

There are extra second-order effects culminating from this mis-specification. Given this mischaracterization, you get some additional, non-trivial harms. When you tell people “we’re just letting the market work,” but what they see is concentrated power, predatory finance, and collapsing protections, you undermine the perceived legitimacy of both markets and democracy. That’s very Polanyian “double movement” territory. (Wikipedia) If you treat deregulation + tax cuts as “neutral” and everything else as “intervention,” you bias the policy discourse toward non-interventions even when the status quo institutions are obviously producing rent-seeking and misallocation. Rodrik’s “second-best institutions” point is essentially: once you admit pervasive market and government failures, there is no neutral benchmark — you need context-specific institutional fixes, not rote “more market” moves. (NBER) Conceptually, this means that markets are path dependent and therefor are subject to institutional design.

The natural replacement for old-school supply-side, and honestly probably the consensus among legit economists, is something like Market-shaping / institution-shaping policy rather than “let markets rip”: Competition policy, Labor-market institutions , Information/disclosure regimes , Public investment and industrial policy, and  Social insurance as a stabilizer.

Rodrik’s recent work basically says: stop arguing “state vs market” and start designing institutional bundles that generate high productivity, broad participation, and resilience. (Project Syndicate) That’s still “supply-side” in the literal sense (it’s about productivity, capacity, and long-run output), but it’s the polar opposite of the tax-cuts-plus-deregulation ideology. The entire supply-side frame is built on a fictive, disembedded notion of “the market,” and once you take institutions seriously, most of its clean separation between “government” and “market” dissolves.

The Limits of Markets

Even if we take “markets are good at allocating resources” as a generous starting point, supply-side economics quietly assumes they’re good at allocating almost everything that matters and that private return is a decent proxy for social return. That’s not just empirically dubious; it collides head-on with core welfare economics and our understanding of core concepts emerging from systems sciences.

Even in the best case, markets don’t solve all allocative problems. Take the textbook, generous view of markets: Under strong conditions (perfect competition, complete markets, no externalities, no public goods, full information, etc.), competitive equilibria are Pareto efficient (1st welfare theorem). But even in that world, efficiency ≠ justice, and it already doesn’t tell you which Pareto efficient point to pick without lump-sum transfers (2nd welfare theorem). Supply-side rhetoric implicitly does three sleights of hand here. First, it treats “efficiency of competitive markets” as if it extends to all domains where we currently use markets. Second, it treats the absence of markets for some goods (climate stability, public health, civic trust) as either irrelevant or inherently unsolvable. Third, it acts as if we can ignore distributional objectives because “growth lifts all boats,” which, empirically and theoretically, we have already pushed back on. In other words: even within mainstream welfare economics, markets are never a complete solution set; they’re at best one tool in a larger social-choice problem. Markets are have limited scope, and the competitive outcome is a somewhat rare instantiation.

The "public goods vs private goods" distinction is not a clean cut. The textbook has:

• Private goods: rival + excludable (bread)
• Public goods: non-rival + non-excludable (national defense, lighthouse)
• Common-pool resources: rival but non-excludable (fisheries, atmosphere sinks)
• Club goods: non-rival up to capacity, excludable (toll roads, paywalled info)

But in practice, lots of important goods are:

• Mixed: e.g. health, education, basic research, digital infrastructure.
• Context-dependent: a piece of information may be non-rival but de facto excludable via IP; a park is non-rival at low usage, rival at high congestion.
• Systemic: resilience of power grids, trust in institutions, epidemiological externalities, etc.

Supply-side frameworks tend to treat many quasi-public or common-pool goods as if they were standard private goods (“just let markets supply healthcare/education/retirement; they’ll be more efficient”). They also underweight the non-market spillovers: human capital externalities from education, herd immunity, civic cohesion, environmental thresholds, etc. So this “scope” assumption is basically: If we haven’t proved something is a pure public good, treat it as a private good where markets will do fine. That’s backwards from a precautionary perspective; you’d want to actively justify relying on markets where externalities, irreversibilities, or distributional stakes are large.

Furthermore, markets are structurally short-sighted. Private agents typically discount the future at market or personal discount rates; face finite horizons (career length, CEO tenure, VC fund life, political cycles); and cannot contract over all future contingencies. So even when a long-run socially optimal plan exists, you often get underinvestment in long-lived, high-externality assets (basic research, green infrastructure, prevention) and overexploitation of resources where the costs are heavily backloaded (fossil fuels, groundwater, soil, biodiversity). Supply-side doctrine usually assumes that aligning incentives via lower taxes and fewer constraints will let private actors internalize intertemporal tradeoffs. But for climate, global commons, and intergenerational issues, the missing markets are fundamental: future generations can’t bid, the unborn can’t sue, non-humans don’t transact. Capital markets don’t magically fix this; if anything they anchor behavior to short-run performance metrics. One way around this is to simply deny the existence of climate change in order to retain the dogma. This short-termism is amplified by corporate governance and capital markets. For example, CEO comp tied to share price; buyout threats and activist pressure; and benchmarking on quarterly earnings. These create massive disincentives that orient the allocation of resources to the short term. Also, combine this with political cycles. Elected officials face re-election in 2–5 years; Incentives to deliver visible short-run boosts (e.g. tax cuts) vs slow-burn investments with diffuse beneficiaries (e.g. lead pipe replacement, climate adaptation). This fact alone further substantiates the fact that markets are indeed embedded within broader institutions. Supply-side proposals that say “cut the corporate tax and red tape so firms can invest for the long run” largely ignore that the internal governance of firms may steer the gains into payouts and short-term signals, not long-horizon projects.

A system archetype is a pattern of behavior of a system. There are very clear system archetypes of unregulated markets that generate pathologies. Below are canonical system archetypes that fit markets under weak institutional constraints:

1. Tragedy of the commons

• Fisheries, emissions, traffic congestion, overuse of antibiotics, data as a privacy commons.
• Market prices don’t incorporate the full marginal social cost; private optimization drives the system past safe thresholds.

2. Success to the successful (positive feedback, increasing returns)

• Network effects, data advantage, cumulative R&D, brand power.
• Early wins → more resources/attention → further wins, leading to dominance and lock-in.
• Markets without countervailing power or antitrust will not converge back to competitive equilibria; they stabilize around entrenched winners.

3. Shifting the burden

• Reliance on short-run fixes (cheap fossil energy, financial engineering, punitive criminal justice) instead of structurally solving underlying problems (energy transition, productive investment, social policy).
• Markets respond to current price signals; they don’t spontaneously invent missing Pigouvian taxes or structural reforms.

4. Drift toward low performance

• If regulatory standards and public capacities are eroded (“cut waste, deregulate”), the reference level gradually ratchets downward.
• Firms and political actors adapt to lower expectations, further weakening pressure to maintain quality, safety, or inclusion.

A “just let markets work” ideology is blind to these stock-flow, feedback, and threshold dynamics. It assumes marginal price signals are sufficient information; systems thinking says “no, the structure and feedbacks of the system matter, and markets are one element within that.” Interestingly, environmental scientist Donella Meadows et. al. published "The Limits to Growth", where she and the authors tkae a system dynamics approach based on Jay Forrester's ground breaking methodology for analyzing complex systems. They identify causal loops like as the ones listed above, and use simulation models to conclude market economies are necessarily growth constrained in the long run. This seems obvious to anyone approaching the question from the starting point of economies and markets being subsystems of broader ecosystems. The backlash from the Economist community was astounding. It seems much easier to cling to the faith based claims of market self correction than to understand the limitations and scope of modern economies.

Ok so basically what I've been arguing so far is that there is a Category error about markets vs government. Markets are institutionally constituted; there is no neutral, pre-political “market” for the state to simply step aside from. Regulation often functions as enabling constraint, making markets more competitive and information-richer, not less. Even if markets were fantastic at allocating standard private goods under nice conditions, many of the most important allocative problems (climate, health, education, care, social insurance, long-run risk) are public / quasi-public / common-pool / intergenerational. Treating everything as if it’s just another private-good sector where tax cuts + deregulation will improve allocation is analytically unjustified. The framework basically identifies “efficiency” with short-to-medium-run private profitability. It has no serious story for intergenerational equity, systemic risk, or maintaining critical commons beyond “growth will give us more resources later,” which is precisely where tragedy-of-the-commons dynamics bite. It inherits the comparative-static, partial-equilibrium instincts of very simple models and applies them to highly path-dependent, feedback-heavy systems. That’s how you get people defending fossil-fuel tax breaks or deregulated finance as “pro-market”—they’re literally ignoring the system-level behaviors those markets produce.

Supply Side Economics Actually Says Nothing about Growth

Before diving into growth, I want to first discuss what the "capital" in "capitalism" means, from a practicing economists perspective. This is relevant because it flows directly into growth concepts and makes apparent how supply side economics doesn't really address the factors of production. Economists use “capital” as a family of related ideas rather than one single thing. What it means depends on whether you’re doing production theory, finance, growth accounting, inequality, or institutions.

In mainstream production/growth economics, capital is a stock of produced assets used to produce other goods and services over time (machines, buildings, infrastructure, and—often—intellectual property). National accounting definitions follow this “produced assets” idea. (UNSD) Economists often distinguish capital stock (the accumulated asset base), and capital services (the flow of productive services the stock provides each period). (OECD) In finance/banking contexts, “capital” can mean funds (or financial resources) and the claims on real assets (equity, debt, reserves). This creates constant confusion, and measurement manuals explicitly warn about mixing “physical assets themselves” with “the funds out of which they are financed.” (OECD) In macro/inequality debates, “capital” is sometimes used as market value of assets (wealth). That can include things that aren’t “productive capital” in the narrow production-function sense (notably land and rents), which is one reason people argue about what “capital” statistics really mean. (American Economic Association) Marxian and some institutional/political-economy approaches treat capital not just as “stuff,” but as a social relation—ownership/control of productive assets and the resulting claims on income (profits, rents). This is one reason “capital” discussions often slide quickly into debates about power and distribution. But generally, "capital" is boiled down to these things:

1. Produced (physical) capital: Structures, equipment, machinery, infrastructure—the classic “capital goods.” In national accounts: fixed assets are produced assets used repeatedly/continuously in production for more than a year (plus other produced assets like inventories/valuables in broader definitions). (UNSD)
2. Intangible capital: Assets like software, R&D/innovative property, data, brand equity, organizational know-how. A large literature argues modern growth is hard to understand without treating these as capital-like investments. (NBER)
3. Human capital: The “capital” embodied in people—skills, education, training, health—treated as an investment that raises productivity and earnings potential. Becker’s work helped formalize this as investment in human capital. (NBER)
4. Social capital: Resources embedded in relationships—networks, norms, trust, reciprocity—that make cooperation and exchange easier. Putnam’s common definition centers on networks and norms of reciprocity/trust. (California State University, Northridge)
5. Natural capital: The stock of renewable and non-renewable natural resources (air, water, soils, minerals, ecosystems) that yields a flow of benefits (“ecosystem services”). (seea.un.org)
6. Financial assets and liabilities: (equity, bonds, loans, bank capital, etc.). Financial capital is mostly claims on (and financing of) real assets, not the productive assets themselves—hence recurring conceptual disputes. (OECD)
7. Institutional / “intangible” capital at the societal level: World Bank “wealth accounting” frameworks often group things like institutions, rule of law, and other intangibles as part of national wealth alongside produced, human, and natural capital—because they help determine the returns to all the other capital forms. (wavespartnership.org)

In practice there is obviously significant overlap. Training creates human capital; codified knowledge (software, patents, databases) is often treated as intangible capital. They reinforce each other. Trust and norms (social) are easier to sustain with credible enforcement and stable rules (institutional). Natural capital is often an input to (or constraint on) production; produced capital can substitute for, complement, or degrade natural capital. Finance channels resources into produced/intangible/human capital, but finance can also inflate valuations without increasing productive capacity—so wealth measures don’t always track productive capital cleanly. (American Economic Association) A market economy “works well” (high productivity, innovation, broad opportunity, resilience) when the key capital stocks are accumulating in sustainable ways and can be productively combined.

• Produced + intangible capital: raises productive capacity and enables new products/processes; intangible investment is central to innovation-based growth. (NBER)
• Human capital: enables specialization, adoption of new technologies, and higher labor productivity. (NBER)
• Financial capital: channels savings to investment, supports liquidity and risk-sharing, and helps fund long-gestation projects (infrastructure, R&D). (But it works best when incentives align and regulation contains excessive risk-taking.)
• Social capital: reduces transaction costs (less monitoring/enforcement needed), supports cooperation in supply chains, and helps markets function where contracts are incomplete. (California State University, Northridge)
• Natural capital: provides essential inputs and ecosystem services; degrading it can raise costs and reduce long-run wealth. The UN/World Bank framing treats it as a stock that must be maintained to sustain flows of benefits and prosperity. (seea.un.org)
• Institutional capital: credible property rights, contract enforcement, and predictable rules increase the expected returns to investment across all other capital types. (World Bank)
• At the macro level, wealth-accounting work finds growth in human and produced capital has been a major driver of rising “real wealth per capita” in recent decades. (World Bank)

Supply Side economics has almost become synonymous with "economics" more broadly, and yet has very little to say about capital or the factors of production. It really didnt become obvious to me until I took a step back years later from arguing about optimal tax rates and realized it's pretty much silent on economic growth and merely assumes everything significant economic question can be reduced to deregulation & tax cuts. Supply side economics doesnt even address the determinants of economic growth; it does nothing to target known causes of growth. If anything, the side effects negatively effect growth; increased rent seeking reduces the effectiveness of democratic governance. Acemoglu for example notes the link between effective institutions and growth. It also seems to conflict with Sens and Nussbaums Capability approach, because it fundamentally conflicts with the Concern for the distribution of opportunities within society, and does not directly address the functions and capabilities of human capital. It also seems to fundamentally conflict with Endogenous growth theory , and qualitative aspects of growth, etc. Once you bring modern growth theory and the capabilities literature into the picture, supply-side economics starts to look not just incomplete, but almost orthogonal to the actual levers of development.

Across Acemoglu/Robinson, endogenous growth, and the broader literature, you get a pretty consistent set of “deep determinants”:

• Institutions: inclusive vs extractive economic and political institutions; secure property rights; broad-based access to opportunities; constraints on elites; rule of law. (Wikipedia)
• Human capital: education, health, skills — both levels and distribution. (Reed College)
• Innovation and knowledge accumulation: R&D, learning-by-doing, diffusion; the whole Romer / Aghion–Howitt endogenous growth machinery. (Wikipedia)
• Complementary public goods and infrastructure: transport, digital, legal, scientific infrastructure.
• Reasonably broad inclusion: newer work in growth + inequality suggests extreme inequality and captured institutions slow growth via underinvestment, instability, and weak demand. (Wikipedia)

If you look at that list and then look at the political version of “supply-side economics” (top rate cuts + deregulation + weakening of labor/competition policy), the mismatch is stark. Acemoglu & Robinson’s distinguish inclusive institutions from extractive institutions. (Wikipedia) Inclusive institutions secure broad property rights, open access to opportunities, enforce constraints on elite rent extraction, and reflect pluralistic political power. Extractive institutions narrow control of economic opportunities, place weak constraints on elites, and enable policies that allow a small group to extract rents from the rest. Seen that way, classic supply-side packages "Do nothing to build inclusiveness" (no real focus on rule of law, participation, anti-corruption, universal education/health, etc.), and often strengthens extractive features: increase wealth and political power at the top, weaken countervailing power (unions, regulators), and expand the payoff to rent-seeking. So from an Acemoglu perspective, the doctrine doesn’t really target the main determinant of growth (inclusive institutions); if anything, it nudges things toward the extractive side of the spectrum, which is growth-reducing in the long run. In other words, it is fundamentally inconsistent with accepted nobel prize knowledge in economics.

The capability approach makes this even sharper. Sen/Nussbaum define development in terms of capabilities — real freedoms and opportunities to be and do things people have reason to value, not just income. (Stanford Encyclopedia of Philosophy) Sen explicitly emphasizes the concern for the distribution of opportunities, the multi-dimensional nature of well-being, and the distinction between formal rights and substantive ability to exercise them. (Wikipedia) Supply-side economics, as actually advocated, basically adopts the objective to maximize (or at least prioritize) GDP and/or private profitability; distribution is a distant second. It does this by increasing after-tax return to capital and high incomes, assuming this eventually expands everyone’s opportunities via trickle-down. That conflicts with capabilities in at least three ways:

1. Distribution-blindness: Capabilities care about who gets what opportunities; supply-side is explicitly relaxed about top-heavy gains as long as GDP rises.
2. Neglect of non-market dimensions: Health, education, bodily integrity, democratic participation, care work, environmental security — these are central in Nussbaum’s list of capabilities, but are mostly invisible in supply-side debates except as “spending” to be contained. (Changing Minds)
3. Failure to build human capital capabilities: Cutting progressive taxes and social spending tends to reduce investment in precisely those public goods (education, public health, early childhood, local services) that expand capabilities for the worst-off.

So from a capability perspective, supply-side isn’t just incomplete; it’s normatively misaligned. It maximizes a scalar aggregate (income) that is an extremely poor proxy for the distribution and breadth of capabilities. Referring back to the "capital" list above, we can see supply side economics systematically neglects multiple aspects of captial.

Endogenous growth theory, in all its variants, leans heavily on Human capital accumulation, Innovation and R&D, with spillovers, Knowledge externalities and diffusion, and Policies that shape incentives for innovation; R&D subsidies, education policy, IP design, competition policy, openness. (Wikipedia) Look at how old-school supply-side lines up against that:

1. Human capital: No serious emphasis on universal, high-quality education or health as a central growth instrument. In practice, these are often the spending lines squeezed to “make room” for tax cuts.
2. Innovation: Rhetoric says “more profits → more innovation,” but endogenous growth work stresses competition + incentives: too much market power actually chokes off innovation (Aghion & Howitt’s Schumpeterian models, recent Nobel recognition). (The Guardian) Tax cuts + lax competition policy = higher profits and higher markups, which can reduce innovation pressure.
3. Knowledge externalities: Public funding of basic research and diffusion infrastructure is central in these models. Again, that’s usually not the priority of tax-cut-first agendas; if anything, public research budgets often stagnate or shrink.
4. Policy levers: Endogenous growth models point to targeted levers (R&D subsidies, education, competition, openness, IP). Supply-side politics is mostly about broad-brush cuts to capital and top income taxes, with “deregulation” in the abstract.

Supply-side literally doesn’t target the mechanisms that actually drive long-run TFP growth in these theories, and its side effects (more market power, more inequality, weaker public investment) can easily reduce long-run growth rates. Traditional supply-side is largely indifferent between growth driven by fossil extraction, speculative finance, monopolistic tech rents, or genuine productivity gains; “a dollar of GDP is a dollar of GDP.” It tends to relax constraints that protect commons (environment, public health, worker safety) in the name of short-run cost reduction. That’s precisely where tragedy-of-the-commons dynamics and long-run instabilities show up. So even “granting” some GDP bump in the best-case scenario, it’s easy for that to be low-quality growth: more fragile, more unequal, more environmentally and institutionally destructive. The capability approach and endogenous growth theory both emphasize qualitative aspects of growth and long term sustainability, something supply side economics neglects by design.

Increased rent-seeking reducing the effectiveness of democratic governance. As inequality rises and top groups gain outsized influence, institutions become more extractive and less inclusive; that, in Acemoglu’s framework, is bad for long-run growth. (Wikipedia) From a capability lens, capture of the state by wealthy interests undermines the state’s ability to expand capabilities for the majority. Supply-side policies that increase wealth concentration, expand the payoff to lobbying (e.g., more to gain from shaping intricate tax rules), and shrink public capacity are therefore anti-growth in a very structural sense: they push the institutional equilibrium toward one where growth fundamentals (education, innovation, public goods, rule of law) are under-provided and policy is systematically biased toward rent extraction.

To summarize, Even if we start from the generous premise that competitive markets are efficient where they’re applicable, modern supply-side economics fails as a growth strategy because it misidentifies the core drivers of long-run growth (institutions, human capital, innovation, capabilities, and public goods), focuses narrowly on after-tax returns to existing capital and high incomes, and generates side effects — inequality, rent-seeking, institutional capture, underinvestment in human and public capital, environmental depletion — that directly undermine those true growth drivers. That’s why it clashes not only with Acemoglu/Robinson’s institutional view and Sen/Nussbaum’s capabilities, but also with endogenous growth theory and any serious concern for the quality of growth, not just its scalar size.

Wrapping this Up Before Transitioning

Economists quietly take for granted that markets only work when they’re embedded in a decent rule system, and regulation is part of making markets, not abolishing them. The public however, fundamentally misunderstands this. There are many reasons for this, which I will cover in part two of this blog post. There are essentially very apparent causal factors that keep the public misinformed about what professional economists actually think, ranging from think tanks, media propaganda, and traditional religious institutions. I'll dive into that later, but for now I want to reiterate some points that show very clearly why supply-side policies (and more broadly, market fundamentalist ideology), are fundamentally at odds with modern economics.

The public very confidently thinks “Regulation = communism”, and this is just a category mistake. The caricature goes: Free market → regulation → socialism → communism. From an economists perspective, that’s nonsense. Regulation is about rules-of-the-game, not who owns everything. Communism is about abolishing private ownership of the means of production and replacing markets with central planning. Antitrust, disclosure requirements, capital rules, labor standards, etc., presume private property and markets. They’re about how those markets operate, not about replacing them. So it’s like saying: “Having traffic laws means you’re one step closer to banning cars.” No. It means you’ve accepted cars exist and you’d like fewer pileups and fatalities.

The competitive model is an ideal, and regulation is how we approximate it in practice, such that we reap the benefits described by the welfare theorems. The competitive general equilibrium model assumes many small price-taking firms, free entry and exit, full information, no externalities, and complete contracts and enforcement. None of these just fall from the sky. Regulation is often precisely about:

• Antitrust & merger control → approximate “many small firms” and prevent dominant players from killing competition.
• Disclosure, accounting, and consumer-protection rules → approximate “full information” and reduce fraud and hidden risk.
• Environmental, safety, and labor regulation → price or limit externalities and prevent races to the bottom that destroy welfare.
• Contract and securities law, the SEC, courts → make “complete, enforceable contracts” more realistic.

So if your goal is to get closer to the textbook competitive benchmark, you don’t eliminate regulation; you design it well. The absence of rules is not the competitive model; it’s a different game entirely (monopoly, fraud, capture). Unregulated markets don’t converge to competition; they converge to power. Historically and theoretically early U.S. capitalism (late 19th/early 20th century) saw repeated episodes of massive concentration (railroads, oil, steel, finance), price-fixing cartels and trusts, and financial crises and panics. The answer was not “more purity of laissez-faire”; it was antitrust and financial regulation – Sherman Act, Clayton Act, creation of the Fed, later the SEC, deposit insurance, etc. In other contexts “Shock therapy” transitions (e.g., some post-Soviet countries) show what happens when you “free” markets without building institutions: insider privatization, oligarchic capture, weak property rights for ordinary citizens, high volatility, and repeated crises. That isn’t free competition; it’s market plus power vacuum, which quickly gets filled by whoever can move fastest and grab control. So the empirics line up with the theory: without a strong, predictable, rule-enforcing state, markets do not drift toward the Econ 101 ideal; they drift toward monopoly, oligarchy, and instability**.

For non-economists, it helps to frame key regulators as infrastructure providers, not as “meddlers”. For example, the SEC forces listed firms and financial actors to meet information and conduct standards (periodic reporting, anti-fraud rules, disclosure of risks and related-party deals, etc.). This reduces information asymmetry,lowers transaction costs, and makes capital markets deep enough that ordinary investors can participate at all. Competition authorities (antitrust) prevent anticompetitive mergers, cartels, abuse of dominance. This protects entry and innovation, keeps markups in check, and supports the very thing that “free market” advocates claim to like: competition. Prudential regulators (banking, insurance) set capital and liquidity rules, supervise risk-taking. This reduces frequency and severity of crises, protects the payments system, and makes credit markets usable by firms and households who can’t evaluate systemic risk themselves. None of this is “socialist.” It is literally the plumbing of a market economy.

Key features of modern economic thought include stability, predictability, and a nuanced role of the state. Investment and long-run contracts rely on a credible, predictable rule environment including stable property rights, courts that work, reasonably stable tax and regulatory regimes, and no arbitrary expropriation but also no arbitrary deregulation. When rules are weak or constantly changing, or enforcement is politicized or corrupt you get higher risk premia, underinvestment in long-lived projects, and more short-term, extractive strategies. So regulation is not just “constraints”; it’s also commitment technology: a way for society to tell investors and citizens, “These are the rules, they’re enforced, and they won’t be rewritten on a whim.” That’s exactly what was missing in many “shock therapy” environments: you got privatization and price liberalization without strong rule-of-law, leading to chaos instead of a healthy market economy.

1. Markets are not natural states of nature; they’re institutional artifacts.
2. Without well-designed rules and enforcement, markets tend to produce monopoly, capture, and crises — not textbook competition.
3. Regulation, antitrust, disclosure standards, and predictable policy are part of the infrastructure that makes markets possible and keeps them roughly aligned with the competitive ideal.
4. Calling any regulation “socialism” confuses ownership with rules-of-the-game. A system with strong regulation and private ownership is still capitalism; a system with weak rules and captured markets is still capitalism — just a worse, more corrupt version.
5. The real question is not “government vs market,” but which rules and institutions make markets serve broad, long-run prosperity rather than short-run rent extraction.

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