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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.