system
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human
Exactly what was wrong with Keynesian economics?

Without trying to get too personal or political, I am an older Millennial (30), and am interested in history.  I would very much like to know how we got to this point economically as a country.

From what I've been able to gather, we went from demand side economics (Keynesian) to supply side (Reaganomics?) in the 1970's.  I'm old enough to look back at how this has effected my life and generation. I would love to know what the catalyst was for this change.

I'm not an economist, so I don't really understand demand management or why the 1973-75 recession was so incredibly bad that we couldn't have waited for it to run its course (I am going a lot on the wikipedia page).

Without trying to get too personal/political, it seems to me that supply side economics was a well intentioned idea (and you know what they say a road leading to a certain somewhere is paved with) and maybe we should try going back to the Keynesian way?

I wasn't alive for the 1970's stagflation, so what do you think?  Was it sufficient reason to fix what possibly wasn't broken instead of waiting a little longer for things to sort themselves out, or seek other solutions?
gpt
For a quick and easy introduction you could pick up Tim Harford's recent book **The Undercover Economist Strikes Back: How to Run-or Ruin-an Economy** While he does not get into the politics of the shift in political support, he does lay an accessible groundwork to understand the approaches. 

Keynesian macroeconomics is, at it's most basic, approaching the problem of how well the economy does or does not run from the perspective of demand side management. That is, that if government policy is centered around managing the demand, Aggregate Demand (AD), in the terminology, then the economy will be much more stable in the long run, and produce more wealth in the long run. That problems with the economy are typically problems with the demand in the economy being inadequate or disrupted, and that is the cause of recessions. 

Supply side economics is a school which is something of a subset of classical, or neo-classical economics. The classical (whether neo or not, or something along those lines) tends to see problems in the overall economy in terms of problems with the supply of goods and services, and that recessions result from the supply side. 

Further, the classical schools of thought tend to see economic disruptions as coming from outside the economy. The classical schools see shocks to the economy which may cause recessions or other disruptions as exogenous, that is, factors that are outside of the normal run of the economy. And because the shocks come from outside, and because they're not about demand in the economy, then government policies aimed at demand management, are thought to be the wrong approach, and so government shouldn't do them. In fact, the classical approach tends to believe that for the most part there's nothing practical that the government *can do*. At least in the short run.Keynesian economics, on the other hand, see shocks to the economy primarily as endogenous, that is, as originating from within the economy, and as being a natural part of the economy. And because they are a natural part of the economy, and because government policy *can be used effectively* to mitigate recessions and other economic disruptions, that government *should act*.

Also an important factor is that Keynesians see government economic policy as critically including regulatory policy. The believe that a lot of the endogenous problems in an economy can be prevented or mitigated by a proper regulatory framework. While the classical schools tend to be much more opposed to economic regulation, to one extent or another. 

Supply side economic kind of takes this old debate and heads off on a tangent. Like the Keynesians, Supply siders think that the government can act in some ways to stabilize the economy. But unlike the Keynesians, they do not see the problems with economy as Aggregate Demand problems, but rather as Aggregate Supply problems. And so while they will intervene in a malfunctioning economy, their methods of intervention are intended to be to improve the situation on the supply side. That is, if the supply of goods and services available in the economy is improved, or if obstacles to supply, often regulations, are removed, then the economy will improve. 

So Supply side isn't entirely within either the Keynesian or the classical framework, though it has a lot more in common with the classical then the Keynesian. 

Now which is right? Harford in his book makes a point of demonstrating that both endogenous and exogenous shocks do happen. But it appears that most shocks to the economy are endogenous. Though the oil shock experienced in the 1970s was exogenous. And, importantly in the political context, the Keynesian economists who were dominant in macroeconomics  from WWII until the 1970s did not have good theory, understanding, or policy prescriptions, to offer to government to deal with the type of exogenous shock that oil was to the US at that time. As a result of this the Keynesians took a critical hit to their reputation that they never really recovered from. 

Here enters Aurthur Laffer and Ronald Reagan. Laffer was able to convince Reagan, and a number of up and coming Republican leaders such as David Stockman, who became Reagan's budget director, that the Supply Side theories were the way to go. Now had Reagan not won the 1980 election, it might have ended there. George HW Bush, who you recall became vice president under Reagan, famously labeled Supply Side economics as Voodoo Economics. And the old guard of the Republican party at the time mostly agreed with Bush.  But he did win, and also a Republican majority won in the Senate. That plus the Republicans in the House, and many conservative Southern and Western rural Democrats known at the time as the Boll Weevils were sufficient so that Reagan was mostly successful in getting his legislative agenda passed into law. Reagan, for whatever else you want to say about the man, was typically pretty effective in his relationships and ability to work with Congress, including Congressional leaders who were opposed to him on ideology. 

So that's really the story of how Supply Side economics came to be. How it became enshrined in the Republican party is politics. Bush promised to not raise taxes, but then he did, because he was a real fiscal conservative, and very much wanted to address the deficits that Reagan had left behind. And then he lost reelection to Clinton. The lesson Republicans took from this is never raise taxes. 

Now we could get a lot more into the politics of how and why the Republicans got locked in where they did. But I'll leave off from that here. 

>Without trying to get too personal/political, it seems to me that supply side economics was a well intentioned idea (and you know what they say a road leading to a certain somewhere is paved with) and maybe we should try going back to the Keynesian way?

Others around here are better at explaining just what the current schools of economic thought are. Typically among the professionals and academics in macroeconomics, there's a lot of agreement in a synthesis of economic schools that grew out of the 1980s. The golden age of politicians actually listening to economists was in the postwar era. No matter what economists are saying now, politicians are really only hearing what they want to hear. 

>I wasn't alive for the 1970's stagflation, so what do you think? Was it sufficient reason to fix what possibly wasn't broken instead of waiting a little longer for things to sort themselves out, or seek other solutions?

The problem that was going on in the 1970s was inflation due to an exogenous supply shock. Oil. And the economist at the time didn't understand how to deal with that. In hindsight we can say a lot of things. And it probably just had to run it's course. But the politics at the time said otherwise. And the inflation did get serious enough so that a lot of people were open to a different approach.