Understanding Supply-Side Economics

What is Supply-Side Economics?

The term "supply-side economics" was coined sometime in the 1970s. The theory, however, has been in use far longer than that.

I imagine that long before money was coined, some sharp trader likely figured out that he could trade three fire stones for two hunting clubs. This not only would get him twice the amount from a person wanting a fire stone, but it likely also enticed traders to seek him out rather than his competition who had not conceived the notion and wanted one hunting club for each fire stone.

Free Market Flaw: Failures in the Past Are Relevant

Alas, one of the cruelest aspects of free market economic theory seems to be the impossibility for it to exist only in part. Without it existing in total, we must negate the results of anything that is included in free market theory that exists today as the same result if the market were truly free. Though it is not true, it seems to be the excuse espoused by those who support the free market theory. It is also tremendously convenient since so much of what has existed because of belief in the theory had terrible results.

Free Market Failure is Reaching Dangerous Level and How It Began

LOCOM – Lower of Cost or Market – is an accounting principle intended to require public corporations to properly represent their value in public disclosures. It doesn’t always work that way, though. 

Here is how it works: The value of an investment on the books of a corporation is entered at cost. It remains that amount until it is sold, except when the market value of the investment is lower than the cost of the investment. When that happens, the value of the asset must be written down to the market value with a compensating adjustment made to an equity or reserve account as a write off.

While this rule serves well when the value of an investment declines, it actually distorts a corporation’s value when the value of an investment is much greater than its cost.