State the macroeconomic policy

The view that macroeconomic policy must only focus on supply-side performance of economy and should ignore management of the demand side is an extreme free-market approach which has not been seriously attempted by any government in recent times.

There is a general consensus among free-market economists that supply-side reforms are the key to long-term sustainable economic growth and that old-fashioned Keynesian demand-side management can really be harmful to the economy.

The commonly accepted view driven by free-market economists in the 80's and 90's and accepted by modern Keynesian economists is that supply-side performance is the key to long-term economic growth. This scheme rests on the subsequent assumptions.

First investment in the national capital stock is engine of sustainable growth. Only by improving the breadth depth and of human and physical capital can the capacity of the economy increase to provide more jobs without inflationary pressures.

Free-market economists argue that government needs to encourage enterprise and investment. The leading way in which they can do this is by government fiscal policy keeping income and corporate taxation levels low so that firms are incentivised to make profits that can then be reinvested back into businesses.

Second that government policy must liberalise micro markets by getting rid of obstacles which prevent competition or distort the market. Free-market economists favour active competition policy that protects consumers from anti-competitive behaviour and abuse of monopoly power. They also distrust trade unions because they see collective bargaining as a means of creating a monopoly supply of labour and a method of inflating wages and business costs.

Third that free-market economists philosophically believe that markets 'know best' on how to allocate society's scarce resources. They believe that market mechanism responds to price signals and is the best means of responding to human wants and maximising social welfare. This ideological belief in the market is extremely distrustful of old-fashioned Keynesian demand management and socialist command economies. Free-market economists correctly argue that socialist command economies were unable to respond to needs of the consumer, allowed unproductive methods of production to continue and lacked the innovation and invention created by the profit incentive in a market economy.