The Supply-side Approach to Macro-economic Policy: the West German Experience

Abstract

There is a growing awareness that the current economic difficulties of most industrial countries can be ascribed to unsolved structural problems. Governments of most countries have shifted their attention to supply rigidities and their causes. As a consequence thereof, the magnitude and composition of productive potential, rather than its current rate of utilisation, become a matter of economic policy. The drastic oil-price increase in 1973–74 intensified competition from newly industrialising countries of the Third World and the disincentives caused by the expansion of the public sector have revealed structural weaknesses in the mature economies. A large part of unemployment and inflation is interpreted as resulting from rigidities on the supply side. Supply-oriented policy can be seen as an attempt to restore and enlarge adjustment capacity, which was eroded during an era dominated by the belief that demand management is an answer to all serious economic problems. Disenchantment with this policy in the course of subsequent inflation has redirected the attention of policy makers to the supply side of the economy.