Just what is supply economics? According to the business press, it is the latest successor to Keynesian economics: if we could ditch obsolete ideas and get a better answer for the supply side of the equation, we could overcome stagflation.

Supply economics has as many meanings as there are economic philosophies. To the serious student of economics, whether it be Social Analysis 10 or any other level, the supply side is simply the resource-production-cost aspect which is a part of any economic system, and is at the center of most socialist and less-developed economies. Advanced industrial societies seemed to have the production problems solved, and their business cycles appeared to originate mainly in fluctuations of private and public demands. The Keynesian analysis seemed appropriate since its focus was on the demand side.

Supply economics began to reemerge during the worldwide boom of 1971-73, when food, steel, chemicals and other basic industrial materials became scarce, helping to trigger the worldwide inflation. The initial intellectual reponse to that situation was a renewed call for economic planning: if industrial bottlenecks or world food supplies are the cause of inflation, then a more careful planning of capacity and production seems only logical. Not much came of this initiative as the economy sank into recession and slow growth, though traces of the planning philosophy can be found in the legislation that was finally passed under the name of Humphrey-Hawkins.

More recently, supply economics has been captured by the opposite end of the philosophical spectrum. The easily documented decline of productivity growth is attributed to a reduced rate of capital formation and diminished incentives to work. Excessive business and personal taxation are the depressants which produce these unfortunate results. In its extreme Kemp-Roth form, the damage to capital formation and work effort by the tax system is said to be so great that massive tax relief would create more supply than demand and lower inflation. This is indeed a counter-Keynesian conclusion since it associates a huge increase in fiscal stimulus with a reduction in inflation. The challenge to this school of supply economics is to show empirically that the supply response created by a massive tax cut would be greater than the boost in demand. Otherwise, Kemp-Roth is just another recipe for inflation.

Where do the troublesome middle-of-the-roaders, usually identified as the main stream, stand on supply economics? Supply is the dominant determinant of the current business cycle. The economy is entering recession because the previous boom bounced against the supply constraints of industrial capacity and energy. It was not just Iran which created the gas lines but a more permanent use of energy beyond available supplies. Indeed, the double-digit inflation was created before the recent round of oil troubles, originating in a general shortfall of industrial capacity and renewed food troubles.

Over the next year or two, the recession will shift attention back on demand. When will real disposable income turn up to reverse the shrinkage in the circular flow of production, income and spending? When will spending attitudes improve to give a little extra boost to retail sales? But this period of demand dominance will be short-lived. If growth were to return to the normal 3 to 4 per cent range, the economy would be running out of energy supplies and industrial capacity as early as 1982 and the stage would be set for another supply-induced recession.

In summary, supply economics is the proper brand for the day, but don't look for miracles. An end to inflation does not lie in the planning prescriptions of the left or the extreme tax cuts favored by the right. It will take years and real sacrifice to alleviate the supply constraints--to build up our capital stock and adapt to the new energy situation.

[Otto Eckstein is Warburg Professor of Economics.]