SMARY IN ENGLISH John Maynard Keynes once wrote that the actions and beliefs of practical men in business and government are often guided by the ideas of academic economists who have written years before. In Keynes' own words, `... the ideas of economists and political phlosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.` (Keynes, 1936, p. 383) In recent years supply- side economists have been those influential economists. In the decades since Keynes' death, his disciples became the `common sense` of economics. Keynesian thinking became the mainstream model for theorizing about the macroeconomy and for implementing the policies. Keynesian economics and its demand-side policies became the common languege of policy analysis. Keynesian economics stressed the determinants of aggregate demands; supply was not forgotten, but it was considered `relatively exogenous`. Less attention was paid to supply; attention was focused on topics such as the relative effectiveness of monetary and fiscal policy. A major revolution in economic thinking is under way. Mainstream macroeconomics is now under attack by both theoreticans and policy makers. There is a retreat from the Keynesian ideas that have dominated economic policy for the past years. Fundamantel attitudes about 240241 economics are changing in the textbooks, implementation of macreeconomic policies. Some of the new thinking is reflected m what has come to be called `supply side` economics. The intellectual origins of supply-side economics are ancient, as the calendar of economics would date it, to be found in the works of classical economists. Its newness is to be found only in its applications, begining about a decade ago, to the fiscal, particularly, tax issues of American society. As it is stated by Lester Thurow (Thurow, 1983, p. 126) it represents a return to economic fundamentalism in which the basic tenets of the Neoclassical (price auction) model are accepted without reservation: markets will quickly adapt to new conditions and, left alone, market (and economy) will generate the highest possible level of welfare, unfettered market economies can't per form poorly. For this reason government and other non- market institutions must be taken off the back of the people and out of the economy. If any deviation exists here from the main currents of economics, it is the supply- sider's belief about the speed of market adjustments and the size of the incentive effects. Supply-side economics refers both to a broad interest in the determinants of supply (capital, labor, efficiency) and to a narrower focus on tax reductions to increase the supply of saving, investment and labor. Supply-side economists discuss both, pointing out that the role of incentives and the role of relative prices. Since the economic actors (agents) in the traditional (Neoclassical) economics are extremely sensitive to relative prices, a program that cuts taxes and reduces transfer payments can reduce distortions and have a dramatic effect on the willingness of individuals to work, save and invest.242 Fiscal policy instruments (taxes and expenditures) although they have no macroeconomic income effects, they do have effects on relative prices: They encourage or discourage the market-oriented efforts. The large tax cuts that designs to increase the after-tax rate of return to labor and capital will create a relative price (or incentive) effects so that workers and capita lists will work harder and save and invest more. The GNP rises and unemployment falls, supply-siders say, not because of the macroeconomic effect of this fiscal or monetary policies but because of the mıcroeconomıc incentive effects. The economy's response to supply- side incentives would be so large that a cut in tax rates would quickly produce an increase in tax revenues. But the weight of economic evidence is against such assertions. In practice the program that includes a large tax cut, a cut in social welfare spending, less government regulation and a restricted rate of growth of the money supply have only temprorary effects both on the supply side of the economy and on the supply of saving, investment and labor. The magnitude of the incen tive effects has been almost always amall. There is no clear evidence to suggest that tax cuts and other fiscal incentives have dramatically increased long-term growth potential. In the U.S. experience, m particular, the labor force has grown less rapidly than in previous years, despite lower marginal tax rates. Net investment relative to GNP is still lower than in the late 1970s and early 1980s, Growth in productivitiy has been on the low side relative to prior recoveries. The saving rate has not risen, despite large reduction in marginal tax rates and record high real interest rates. Supply-side incentives has been so small that a cut in tax rates has not produced an increase in tax revenues; on the contrary, large budget deficits has emerged. As a result243 of all these changes, the burden of paying for government has shifted slightly from higher- income taxpayers to lower-income taxpayers. Supply-^side policies recomended by supply-siders and practised by President Reagan have contributed substantially to growing income inequality within each income group. The policies pursued by President Reagan not only have affected people's economic well- being to date, but also will play an important role in determining their future welfare. This study also aimed at examining the factors that determined the private investment m Turkish Manufacturing Industry. The results of regressions applied to the available data of the relevant section of our economy (1965-84) for the purpose of the estimating the effects of the relative prices (real after-tax rate of return) on factor (capital) productivity are taken up. The user cost of capital, as another important factor that affects capital productivity is also examined. While they are taken up it is assumed that the technical con ditions of the production process that influences those factor productivity and supply are constant. Some of the results of the empirical study presented m this study can be summarized as follows. During the 1973-74 and 1977-80 periods, both real pre-tax rate of return and real after-tax rate of return on capital have decreased. Real private fixed capital investment declined steadily through out the 1980s whereas the private sector showed a higher real after-tax rate of return in the same years. Indeed while legal nominal corporate tax rate seems to be high, because of the high tax promotion measures (deductions, exemptions) effective corporate tax rates have been significantly low. A glance at the development of user cost of capital between 1981 and 1984 shows that when cost of capital increased, especially244 because of the increasing real cost of credit and price of investment goods, private investment increasing rate slow down. Both the one period lagged real after-tax rate of profit and real user cost of capxtal were assumed to be functions of the real private fixed capital investment. The parameters of these variables are found to have insıgnificıant. This result is not in conformity with the findings of some other studies like Feldstein (1982a). It has not been possible to obtain a conclussive evidence for the relative price (or incentive) effect of private investment from the estimation of private investment equations. If private investment is not sıgnıfıcıantly affected by or sensitive to the rate of return on capital and cost of capital, then, increasing the profita bility on capital or decreasing the cost of capital through financial or fiscal investment promotion measures might lead to an inefficient use of resources. The magnitude of the net effect of this promotion measures, that is, net of losses due to inefficient use, should be taken into account and determined. In sum, whatever the validity of the supply-side argument, there is no question that it is a logical product of Neoclassical view of the world. And things did not work out as supply-siders said. Structural reforms, including `supply-side` measures, may increase potential GNP and/or its growth rate. But experience suggests that such effects are small and slow, difficult to discern and predict. Indeed it is not useful to look at either the demand-side or the supply-side by itself. As it is stated by Lawrence Klein, the main issue is not between demand-side and supply-side policies, it is between aggregative (macro) and structural (micro) policies.245 (Klein, 1983, p. 133) In terms of the policy debate, demand management does have a role to play and should not be cast asxde. The main issue is not to roll back reliance on demand management, but to recognize its limitations. It is necessary but not sufficient and many supply-side policies particularly the improvements of the technical conditions of production process have to be introduced If the problems of the day are to be overcome. The problems of the day that cannot be attacked by macro-demand management alone are policies associated with shortfall of basic resources, producti vity improvement, bottlenecks of production, enviromental protection, energy supply. For this reason policies have to be more specific and structural.
