Supply or demand?

As any student knows, economics is about supply and demand. And, as regular readers of this column know, "supply and demand" is the most common phrase spoken by my parrot, Maynard.

Maynard is named after John Maynard Keynes (1883-1946), Britain's most famous economist. Ask Maynard (the parrot) to explain any economics problem and he'll say "supply and demand". Usually, he's right.

But sometimes we want to know whether supply or demand is more important. Here, simply repeating "supply and demand" doesn't help.

In the one corner of the macroeconomic debates are the "supply-side" economists who believe the supply of goods is the driving force. They emphasize the role of incentives (such as low taxes) to encourage people to work hard, take entrepreneurial risks and produce more.

They also typically believe that the supply of goods will generate the demand necessary to buy them. This is often called Say's Law, after the French economist and businessman Jean-Baptiste Say (1767-1832).

In the other corner are the "demand-side" economists, inspired by Keynes, who believe that demand for goods and services plays the key role, particularly in times of recession. The answer here is to increase government spending or cut taxes to encourage people to consume.

At the moment, the demand-side economists have the upper hand. But another supply-versus-demand battle is raging, as described recently by the chief economic commentator of the Financial Times, Martin Wolf.

As Wolf says, some countries, such as the US, UK and Spain, have been spending much more than they produce — that is, they have a balance of payments decifit — while others, such as China, Germany and Japan, have been producing more than they spend.

Experts disagree about whether this global imbalance was ultimately caused by the demand side (the US wanting to spend, spend spend) or the supply side (China wanting to save, save, save).

Arguing about the cause is now less important than dealing with the problem of collapsing demand in the US and elsewhere. To bring global supply and demand back into balance, either supply must fall — meaning a deep global recession — or demand outside the US (particularly in China and Germany) must rise.

As Wolf says: "Obviously, expansion of demand is much the better solution". But this will require international coordination, a difficult task for the new US president, Barack Obama.

Maynard, who flew into the office recently, agrees with Martin Wolf. When I asked him the simple question, "supply or demand?, he squawked loudly: "demand, demand, demand". Once again, I agree with Maynard.

The parrot has a point