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What is Demand-Side Economics?

Jessica Ellis
By
Updated May 16, 2024
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Demand-side economics is an economic theory which suggest that economic stimulation comes best from increasing the demand for goods and services. Also called Keynesian economics, after John Maynard Keynes, this concept is usually placed in direct opposition with supply-side economics, which suggests that stimulation is achieved through increasing the supply of goods and services. Like most economic theories, it is far easier to understand the principles of demand-side economics in theory rather than in practice; it should be noted that no theory of economics has ever been proven to work at all times, in all situations.

Demand-side economics is first and foremost a means of ridding an economy of a recession and stimulating economic growth while preventing inflation. It is meant as a control on both expansion and retraction, to keep an economy in a stable zone. The idea is that to stimulate growth, a government should lower taxes on the middle and working class, and increase government spending. To combat rising inflation in an expanding economy, a government should raise taxes and reduce spending.

The concern of demand-side economics is the velocity or movement of money. According to the theory, middle class and working class people are more likely to spend a high percentage of income on consumables and services, rather than stockpiling money in saving accounts or investments. If a person buys milk at a local grocery store, the grocer can then take his profit and get his car fixed, and the mechanic can take his money and go to a movie; in other words, the money keeps moving around, stimulating demand for goods and services. By lowering taxes and increasing government spending, these high-spending classes are given more capital to spend, thus stimulating the economy.

This field of economics is often contrasted with supply-side economics, which suggests that cutting taxes on the wealthiest people allows business owners to create more jobs and thus the wealth will pass down from top to bottom. In the United States, demand-side economics are associated with Democratic policy while supply-side economics are associated with Republican policy. Interestingly, the father of supply-side theory was Karl Marx, who is primarily associated with the theory of Communism and thus is a somewhat surprising voice in capitalistic economic theory.

Though demand-side economics has certainly had some measurably beneficial effects on various economies, it has also had its problems. Many economists blame the application of the theory for the bizarre rise of “stagflation” in the US in the 1970s. This situation occurred when inflation continued to rise even in the face of higher taxes and a stagnated business market. Consumers, fearing even more price increases, spent more, which continued to increase demand even in the wake of rising prices and interest rates.

Economy is often compared to the weather: a person may understand how clouds are formed, but not know how to stop a storm. Similarly, understanding economic theory does not always lead to favorable results in practice. Like other economic theories, demand-side economics works sometimes and fails sometimes depending on the market and a wide variety of other factors.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jessica Ellis
By Jessica Ellis
With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica Ellis brings a unique perspective to her work as a writer for SmartCapitalMind. While passionate about drama and film, Jessica enjoys learning and writing about a wide range of topics, creating content that is both informative and engaging for readers.
Discussion Comments
By anon308696 — On Dec 12, 2012

Both political parties just bash each other on how bad there economic policies are. It's hilarious! I'm a Republican and the truth is that both supply-side and demand-side economics work! Each type does not work at all times in all situations.

Supply-side economics are used during mild recessions and prosperous times. The 80's and 90's are proof supply-side works. Clinton and Reagan are our top two jobs creators. Reagan created 16 million jobs and Clinton created 23 million. Yes, Clinton was a Democrat but he was moderate and Republicans had complete control of Congress for six of his eight years as president.

Demand-side economics are used during recessions. The great depression are proof demand-side works.

Supply-side economics happen in prosperous times then a recession usually hits and then demand-side economics are put into effect to get out of the recession.

By anon280853 — On Jul 20, 2012

The reason demand side policies are always disastrous periods is that when the economy is in a recession or depression is the only time these policies are needed to bring us out of the economic downturns. A recession causes the need for demand side policies. The demand side policies do not cause the recession.

By anon270999 — On May 24, 2012

Great article. Cue right wingers who support supply side economics and monetarism which have failed spectacularly, especially as opposed to the Keynesian golden age of 1950s to 1970s.

By anon243476 — On Jan 27, 2012

The person who designed Reaganomics says it was a failure.

Supply side fails because people fail to see what happens when the demand side fails.

By anon242901 — On Jan 25, 2012

Keynesian economics is not just demand side economics. Keynesian economics is the belief that the government in any capacity plays a role in stimulating the economy. Supply side economics is still Keynesian in theory because it relies on the government to take an action.

Demand side economics was not to blame for the stagflation of the 1970's. A supply shock caused by an energy crisis did. When businesses have to raise their prices because of a sudden increase in their fixed costs it causes a wage/price spiral where the cost of goods rise while wages go stagnant. This affects consumers in such a way that they can no longer afford a higher quality product and consume more staple goods. This new demand in turn depletes the supply of staple goods and sharply increases those prices as well. There you have inflation.

By anon203783 — On Aug 06, 2011

the problem with demand side economic when practice it create toxic environment for investors and there for excessive save happens from investors. even through there is consumer spending the economy will increase in size.fear of investing mark the mind set of rescission. Once they feel they have enough money to take risk they start invest and the recession mindset ends.

By anon169907 — On Apr 23, 2011

I am a liberal Democrat and I believe the role of government is to take complete care of its citizens - no matter what the cost. Once we have universal social goods for everyone, then everyone can help each other. As Hillary invented the phrase: It takes a village. We need more villages in this country, to help each other when we all need it most.

In fact, like Al Gore, one of the most influential Democrats who invented the internet, his global warming C02 reducing policies will force the country to reduce carbon usage. Carbon Dioxide is the worst thing in the world - I can't imagine anyone being so close to this dangerous gas. So stop driving your cars.

By anon168756 — On Apr 18, 2011

GreenWeaver has a very selective memory. He does not remember that the stock market crash and Great Depression occurred in 1929 and FDR took office in 1933. During those four years, the Republicans tried to cut spending and balance the budget. In that time, the Dow Jones went steadily downward from 300 to 42. From the day FDR took office to the end of his first term, the Dow went steadily up from 42 up to 187.

He also does not remember that Reagan raised taxes eleven different times during his presidency. And why he thinks that a landslide election victory has anything to do with economic principles is a real mystery. Mustn't he also, then, conclude that LBJ's landslide vicory in 1964 proved that a top tax rate was at 70 percent is best?

When supply side economics results in a depression, it is demand side economics that sees us through to the other side. When GreenWeaver sees fire trucks outside of burning houses, apparently he concludes that fire trucks caused the fires.

By anon153282 — On Feb 16, 2011

Answer this. Why increase supply when there is no demand? The reason business can not increase or expand is because there is no or slow demand .

Even if the government gives me all the tax breaks in the world, I as a businessman will not produce more when there is no demand for my products. Will you please quit theorizing, all of you?

By GreenWeaver — On Jan 13, 2011

Oasis11- I agree .This is what happened during President Reagan’s administration. Reagan’s policies allowed a creation of 25 million jobs and reduction of tax rates from 70% under the stagflation years of Jimmy Carter to 24%.

This was one of the most prosperous periods in American history which is why President Reagan won reelection by a landslide and carried every state but the home state of his opponent.

Supply side economics works, but demand side economics does not.

It is true that you only have to look at the periods of time when demand side economics was practiced and that was during FDR’s, Jimmy Carter, and the Obama administrations.

These also happened to be the most horrible economic times for America and it is not a coincidence.

By oasis11 — On Jan 11, 2011

Demand side policies are always disastrous periods in our economy. Whenever Keynesian economic theory of deficit spending and high taxes are practiced there is so much abject misery that in fact the periods in which demand side management of our economy was practiced were the most miserable times in the United States.

For example, the periods of the Great Depression, the stagflation of the seventies, and our current economic times all experienced demand side economics.

The government cannot stimulate the economy, only businesses can. This is why when you cut taxes for all Americans and reduce business taxes, you actually create an environment in which businesses seek to expand and hire more workers.

Jessica Ellis
Jessica Ellis
With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica Ellis...
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