6. Inﬂation ﬁrst: the new mantra of macroeconomics 6.1 INTRODUCTION With the commitment to full employment abandoned by most governments in the OECD bloc, variously in the 1970s, a new policy framework took some time to emerge and its manifestation was not uniform across all countries. But essential common elements can be identiﬁed that have deﬁned macroeconomic policy making, especially since the 1990s. The rise of monetarism occurred as the world economies were struggling to absorb the consequences of the OPEC oil price shock in 1973. The cost shocks posed the problem of how the real income losses were to be shared among labour, capital and government. Many economies failed to accomplish this absorption in a consensual way and the distributional struggles that ensued further fuelled the inﬂation process. The 1970s was the ‘battle of mark-ups’ period par excellence. However, neoclassical macro economists opportunistically seized the serendipitous moment and elevated the forecasts of Phelps and Friedman to centre stage. In doing so they were able to resurrect into the policy domain the pre-Keynesian natural rate approaches that had been discredited during the Great Depression. In this momentous policy shift, it was overlooked that the Phelps–Friedman account of the dangers of continued full employment, inasmuch as they had any relevance, rested on demand-side shocks feeding into an expectations spiral rather than a supplyside shock provoking distributional conﬂict and incompatible claims. Despite this clear anomaly, the Keynesians gave in with barely a whimper and thus allowed...
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