Although Keynes shook up the economics profession sixty-five years ago, it is his arguments which are now the backbone of modern macroeconomics; and it is his theories which, "defunct" or not, provide the unacknowledged framework for "practical men" and economics students the world over. We in Social Analysis 10 - "Ec 10," in the Harvard vernacular - are no exception. In fact, the very bread and butter of the Gregory Mankiw/Martin Feldstein curriculum, the aggregate-supply/aggregate-demand model, is both highly controversial and as Keynesian as it was in 1936. 

Like Keynes, the Mankiw-Feldstein version of the AS-AD framework explains booms and recessions almost entirely in terms of changes in the amount of aggregate spending. The more people spend, the more the economy grows. Meanwhile, the willingness of individuals to work, trade, think, innovate and invest is practically oblivious to behavioral incentives in the short term. What Harvard students should know is that this view is empirically difficult to defend and notoriously uninsightful as a predictive framework. Furthermore, it has misled well-intentioned policy makers for at least thirty years and continues to do so today. 

For example, since 1993, inflation and unemployment have been falling in tandem. All the while, Alan Greenspan has been plastering warnings of inflationary pressures across the newspapers, with "mainstream economists" echoing him in droves. Their confusion isn't surprising, however, given their adherence to a short-term economic model which all but ignores real production incentives. Yet most of the important economic policy stories of 1990s America have unfolded on the supply side of the economy. Welfare reform, budget discipline, capital gains tax cuts, deregulation in the energy and telecommunications industries, expanded IRA's and a host of free trade agreements have all helped Americans channel their productive energies into the production potential of the American economy. 

Yet the party line of Ec 10 remains that an unemployment rate below 6% is as unsustainable now as it was during the dismal 1970s. After all, every Ph.D. economist knows that potential output growth just can't change from one year to the next. But if this is the case, we must ask ourselves, what has been the motive force behind recent economic fluctuations? The evidence suggests that aggregate demand was not the most important factor, so what was responsible? Sunspots? Phlogiston? El Niño? 

If counting the number of dollar bills circulating through the economy does not tell us anything about the future of real interest rates, production and employment, what does? For the last three years, supply-side economist Jude Wanniski has accurately predicted the Dow Jones Industrial Average within a 400 point range while correctly foreseeing falling inflation, falling interest rates and strong domestic growth. During the same period, the mainstream consensus has been that stock prices are artificially inflated, the economy is overheating, and growth cannot continue without rising inflation and interest rates. 

What separates Wanniski and other supply siders from the mainstream is their reliance on a model which asserts no relationship between nominal spending and real output, concentrating exclusively on how unfolding events will affect relative prices and the feasibility of trade. Ec 10's skepticism of this approach, though couched in sophistication and realism, is as empty as their faith in the ability of government to make people work harder by printing green pieces of paper. 

In one of the required Ec 10 readings, for example, Charles Shultz denies the ability of supply-side economics to explain recessions. "To argue that unemployment in recessions comes importantly from workers voluntarily quitting their jobs is out of touch with reality," he writes. "Recessions are not accompanied by a decline in the capital available to workers. The only available (production related) explanation for the decline in national output must then be the occurrence of absolute reversals in the technological capabilities of business firms." 

Schultz simplifies his opponents' arguments to a ridiculous absurdity. What he fails to account for are the wedges that supply-side disturbances drive between market participants, preventing them from bartering their labor and capital in the marketplace. Let's transport ourselves back to the year 1989, when inflation reached nearly 5%, raising unindexed taxes on interest, dividends and capital gains by almost 50% above 1986 levels. 

Suddenly, all kinds of investments which the capital markets were once willing to finance at relatively low rates of return became bad investments. The real interest rate rose and the marginal product of capital fell. From late 1990 to 1991, investment declined by about $150 billion. Laborers wanted to work and entrepreneurs wanted to employ them, but bad government policy kept the transactions from being profitably financed. As Spencer Reibman, who teaches economics at Georgia State University, explains, "tax wedges keep market participants from doing business, even when they want to." 

Reibman is one of the few economics professors working today who teaches in a supply model. "The problem is that a lot of the pioneers of supply-side dropped out of academia and internalized the externalities of their knowledge," he explains. Harvard's Robert Barro and McGill's Reuven Brenner are two of the most notable exceptions. Meanwhile, ground-floor supply-siders like Arthur Laffer and Jude Wanniski began lucrative careers selling their expertise to companies in the private sector. Reibman goes on to say that "taking courses in the typical Keynesian models is not enough to give you a well-rounded understanding of economics. You have to go out there and search for the truth on your own." 

Two years ago, Wanniski, a former Wall Street Journal editorialist and advisor to President Reagan, decided to give enterprising minds the opportunity to do just that, setting up the first ever Supply-Side University on his website at www.polyconomics.com. In only two years, this tuition-free, voluntary "university" has grown from a registered enrollment of one hundred students to well over a thousand. Harvard educators would do well to behave like entrepreneurs and learn from Wanniski's success. Until then, students in search of the whole truth must seek it independently.