Sen. Edward M. Kennedy (D-Mass.) is a man who knows he's got an uphill fight in his efforts to exploit the critical economic issue to wrest the Democratic presidential nomination from President Carter this summer.

In a year when voters are demanding a balanced budget and sharp cuts in spending, Kennedy is supporting a sizable increase in domestic programs and expensive new initiatives such as national health insurance and welfare reform.

During a period when Americans finally seem to have accepted the notion of lifting oil-price controls, Kennedy is proposing that the government re-impose oil-price restraints and turn to rationing instead.

At a time when most Mainstream economists still believe wage-price controls wouldn't work and would saddle the economy with new distortions, Kennedy has unabashedly made them the centerpiece of his presidential campaign.

Moreover, Kennedy is making no apologies about any of it. His view is determinedly that his own outlook -- not the conservative drift of the country -- is the correct one and that his mission is to persuade the electorate of it.

"One of the responsibilities of a politicial candidate is to try to talk about the realities . . . and not just to give the slogans of an antiquated past," the Massachusetts senator said in an interview last week.

"I think it's a selling job . . . ."

As such, the fight Kennedy is mustering over the economic issue is not so much an offensive one -- in pressing for his own proposals -- as a defensive battle designed to puncture the positions of other candidates.

In a speech before the City Club of Chicago last month, the 48-year-old Democratic challenger decried four "myths" he said are "based on pre-conceptions that may be popular (but). . . also happen to be wrong."

The four:

That federal spending is to blame for the nation's economic problems, and -- as a result -- that balancing the budget would help slow inflation. Kennedy contends balancing the budget would affect inflation only marginally.

That sharp increases in foreign oil prices are the major cause of the current inflation. Kennedy argues that oil-cartel price rises account for only 2 percentage points of the current inflation rate.

That the government must engineer a recession to combat inflation. Kennedy contends no slowdown is necessary and that the economy can continue to grow moderately if the government moves to spur productivity more.

That wage and price controls won't work. Kennedy asserts they will. Controls have received a bad rap, he says, because of the Nixon administration's experiment -- and that stemmed from improper management.

Earlier this month, he added one more "myth" -- the notion that the current inflation was inherited from the 1960s and the Carter administration is not to blame for it.

To Kennedy, there's little real difference between Carter's born-again conservatism and the politics of the leading Republican Presidential candidate, former California governor Ronald Reagan.

Both frontrunners, he says, are espousing "an economic politics that is outworn, irrelevant and in the end dangerous to the social fabric of the nation." And Carter is "striving to become a stale carbon copy" of Reagan.

For Kennedy, Carter's new budget-cutting policies are Draconian and inflationary, to boot. He argues the president's decision to decontrol oil prices and Carter's new oil-import fee will only make inflation worse.

More fundamental, Kennedy charges, Carter's economics "have left behind the best traditions of the Democratic party." For all the current rhetoric, he pleads, "those traditions need not be left behind."

He describes his own program of a wage-price freeze coupled with oil-price control and fuel rationing as "the only credible alternative offered in the 1980 campaign to stop inflation, short of a severe recession."

Kennedy's economic platform has been laid out in countless speeches and policy papers over the past few months:

WAGE-PRICE CONTROLS: To jolt the nation out of its inflation psychology, impost a six- to eight-month freeze on wages, prices, interest rates, profits, rents and dividends, followed by 1 1/2 to 2 1/2 years of mandatory controls.

PRODUCTIVITY: Use the period to push through new measures to encourage more investment and increase productivity, including enactment of faster depreciation writeoffs for business.

SPENDING: Kennedy would reject Carter's latest round of $15 billion in extra spending cuts, leaving the budget about where it was when Carter submitted his January proposals -- but with some cutbacks in defense.

JOBS: Kennedy would propose a major multibillion-boost in a variety of federal job-creation programs, including a sizable increase in the public-service jobs program that some experts price at $5 billion.

He'd also expand other social programs.

TAX CUTS: Kennedy generally opposes Republican-style across-the-board tax cuts, contending economic conditions are far different now than when his brother, the late president John F. Kennedy, proposed one in 1962.

However, Kennedy told an audience last week he might go along with a limited tax reduction -- designed to spur productivity -- if the economy were under a wage-price freeze. He argues the inflation impact would be offset then.

Specifically, he says he supports the "10-5-3" bill for faster depreciation that also has the backing of Reagan and several other candidates. The proposal, which would allow firms to write off buildings in 10 years, machinery in five and vehicles in three, would cost the Treasury $47 billion a year by 1985.

INTERST RATES: The Massachusetts senator decidedly would pressure the Federal Reserve board to relax its restrictive money and credit policies and push interst rates down sharply from their current record levels.

HUMPHREY-HAWKINS: Kennedy supports -- and vigorously touts -- the year-old Humphrey-Hawkins act that set national goals for reducing unemployment and trimming inflation and which virtually all economists consider flatly unrealistic.

TAX 'REFORM': The challenger would revive several so-called "loop hole-closing" provisions -- such as repealing oil-drillers' deductions for intangible drilling costs -- that have been rejected repeatedly by Congress.

ENERGY: The Massachusetts senator would impose controls on oil prices and allocate available fuel throughout the economy by a nation wide gasoline-rationing plan.

He also would propose nearly doubling the recently enacted crude oil tax. And he's advocating a spate of other energy proposals, from a limited synthetic fuels technology program to loans to utilities for conversion to coal boilers.

But outside analysts see some serious flaws in some of the challenger's policies:

Although Kennedy cites support for wage-price controls from a broad range in mainstream economists, virtually all of these outsiders have conditioned any such move on austere fiscal and monetary policies, which Kennedy would avoid.

Kennedy says he supports a balanced budget as "a goal," and even has voted for a Senate plan that would limit overall federal spending to 18.5 percent of the gross national product.

But he would try to achieve that balance not by making spending cuts, but economists recommend, but as Carter has -- by counting on the future budget surpluses resulting from a presumed bounce-back in economic growth -- or inflation.

Analysts also point out that Kennedy's support for a percentage spending limit is inconsistent with his push for bigger social programs. To trim outlays to 18.5 percent of GNP actually would require a massive cut of more than $90 billion.

Kennedy's agreement to go along with a limited tax cut if the economy were under a wage-price freeze seems only to repeat the mistake made in 1972-73 by the Nixon administration -- using controls as a cover to stimulate the economy.

His basic arguments challenging what he calls the four economic "myths" that Carter and the other candidates are proffering are being called into question by economists of both parties.

Kennedy's position that balancing the budget will trim only 0.2 percentage points from inflation now has been abandoned by even liberal economists, who concede spending cuts will have psychological impact as well.

His argument that West Germany and Japan have imported more oil than the United States without sufering as much inflation ignores the fact that they began the latest round of price increases with their oil prices already at world levels.

For all Kennedy's talk about resuming more rapid growth, most analysts still believe the economy must be slowed significantly if inflation is to be wound down. Few really claim to know how to spur productivity.

Kennedy has been touting his combination freeze and controls program as the single most effective action to deal with the economic program -- much the way Reagan is promoting his Kemp-Roth tax-cut plan.

Just the same, as with Reagan's Kemp-Roth plan, Kennedy's proposed controls program also has come under fire as unworkable.

Analysts say first that imposition of a freeze for a full six to eight months, followed by two to three years of controls, as Kennedy is suggesting, would create visible distortions in the economy and bring on major shortages.

Then, too, there's the question of the sheer mechanics of pushing a controls bill through Congress -- a prospect that has given even pro-controls economists some pause.

In the 1971-73 controls experiment, Nixon already had controls legislation on the books -- the gift of a mischievous Democratic Congress, which conferred blanket authority on him on the assumption that he would never use it.

Nevertheless, there's not question that despite the conservative drift in the country, those who still advocate traditional post-New Deal economic policies have an able spokesman in Kennedy.

Despite his wobbly start, the Massachusetts senator has proved himself an articulate, effective campaigner who is capable of arguing his case aggressively, with a skill that makes even his critics marvel.

Rather than bending his position to accommodate the conservative drift, Kennedy has only emphasized his differences with Carter by attacking the president's policies as "myths" and portraying him as a Democratic Reagan.

Of Carter's new anti-inflation proposals, he says the austerity measures are "unfair, unjustified, and it's basically running contrary to the basic commitments of the Democratic party . . . I find that is beginning to take hold."

He particularly criticizes Carter for not having moved early enough or aggressively enough in establishing voluntary wage-price guidelines. "They took them seriously under Lyndon Johnson . . . and President Kennedy," he says.

Unlike Reagan and other candidates, Kennedy hasn't relied on a formal "brain trust" of economic advisers. Instead, staffers say, he seeks help from different sources on each issue -- economists, businessmen and labor leaders.

In Kennedy's view, the chief stumbling block to his campaign so far hasn't been Carter, or even Reagan, but the Iranian situation, which he says has "diverted" Americans' attention from the economic issue.

What the challenger is counting on is that as the campaign goes on -- and the recession get under way -- the economic issue will emerge again. "My own sense is . . . it's going to increase," he says. "It's evolving. It's there."

The question is, will the electorate have second thoughts in the end and return to the Democratic party of days of yore? Or has Teddy Kennedy entered the race 20 years too late to be elected?