The chicken or egg debate (supply or demand.)

In order to figure out the main contributor to the long term economic growth and prosperity, one at least partially has to focus on answering a simple question, what comes first supply or demand. And unlike claims by some well known experts that stimulating the demand is the key to all answers in the economics ( Keynesians are so going to hate me ) the answer is possibly NEITHER.

In order to illustrate that neither comes first, let us step back a little and think with the regards of historic perspective. In the XIV century the three Italian city states have become the greatest merchant outposts and maritime powers. Surely, they would dream to have ships capable of approaching or exceeding those powered by sail when no wind is present. One could articulate that given those states had access to an applicable technology, there would be a huge demand and monetary means available to implement it (steam engine.) However no matter the  resources and money those ships weren't available and no degree of demand could inspire the production of those, only innovation could. Absolutely the same argument could be applied towards the supply.
And almost everywhere in the history the coming of the age of technology that lead to increase in prosperity and LONG TERM economic development starts with innovation rather artificial attempts to boost ether supply or demand.

So why there are so many economists emphasizing the ability of government to push the demand as the best and main tool to enhance economic growth? Why even those economic models that were acknowledged by Noble prize as to highlight the role of innovation as the main source of sustainable economic growth (Solow's Model *) are not accepted or mentioned widely in public?
The answer is simple and could be predicted by the Game Theory - lack of social & financial incentives.  It is rather inconvenient for a government to proclaim, it's quite possible there is nothing we can do. It is much more practical for political reasons to highlight the leadership and proclaim that step that were undertaken are the result of economic improvement and proclaim the victory. So there is a political incentive to reward those in economics that rationalized that certain tools should be used by the government to battle the recessions. As the result those practicing similar views are invited to conferences, government sponsored events and get much wider circulation than those in opposition. Eventually such believes become dogmatic and despite their limited success when all costs are calculated they are deemed as practical and workable. And finally since  economy usually eventually recovers,  those mainstream (Keynesian) practitioners are only too happy to take credit without any admission that costs of the government intervention (not too mention their inefficiency) might be problematic down the road.

So what is the best government policy to implement the LONG TERM economic growth? Well, it surely isn't the demand masturbation. The best policy is probably to be aware of the nature of business cycle, government limitations and flexibility when considering any economic model. Since our society is constantly changing, it only makes sense for our economic models to be flexible and not to be taken as absolute truth. Besides a honest and serious cost benefit analysis of any policy and taking into account a historic perspective could never hurt.

Finally, it is time to acknowledge the role of innovation in the economic progress and study factors that could contribute to innovation rather than omitting the subject because of its subjective nature. Ironically, the main driver for innovation might be a view within the society that innovators and entrepreneurs are cool. Promoting the view that innovation is cool could be rather cheap and damn, those people more than most well deserve our attention and respect.

* Solow's Model of Economic Growth
http://en.wikipedia.org/wiki/Exogenous_growth_model

Unfortunately, most do not focus on the obvious conclusion, that when it comes to economic growth, the innovations runs the show.

Market vs Government.

Due to the severity of the latest credit crisis, there will be plenty of soul searching in the coming years. As usual the process of learning from crisis will be hijacked and sacrificed for personal agendas. Those popularity contests might end up in pointing into the direction of Mr/Ms Market and rise of the populism.   Hence the simple truth has got to be addressed - why market and what is the role of government?

While the main battlefield will be debate regarding how rational the market is, it will be missing the man point. It does not matter how rational market is in the short term, what matters is the efficiency of the system and its long term rationality. So in the end the market had prevailed and will prevail in the future for two simple reasons.

First, a market represents the choice of many. And any government entity while claiming to be working for the good of many will always represent the choice of few. And while those few might have more expertise, a better vision, clear goals,  designs for better for humanity at hearts  their means will not be able to achieve the flexibility needed to reflect most wishes of a majority in a complex system such as the human society. Neither those designs will have the flexibility to adjust in timely manner the way a market system adjusts to changes in a human society.

Second, a market has the greater capacity for self correction embedded by its somewhat anonymous nature. It's unique ability to self destruct and self correct any short term rationality comes with a great ease because the market participants carry dissolved responsibility for their actions. Hence they are more likely to self correct their actions (by selling or sheer panic) and achieve the long term rationality - efficient distribution of resources and pricing. While a government or regulator no matter good intentions
will always hesitate protecting its reputation, such is the human nature.

So what is the role of government? Ideally the first agenda would be making sure none of the market participants can influence the government (lobbying). Enforcing all applicable laws equally for all to promote competition while staying away when possible would be wise. And finally understanding the limits of few humans to oversee and appreciate the complexity of society when compared to the same job done by the whole market would be appreciated (by us, majority of humans).