Full Employment Abandoned

Full Employment Abandoned

Shifting Sands and Policy Failures

William Mitchell and Joan Muysken

This book dismantles the arguments used by policy makers to justify the abandonment of full employment as a valid goal of national governments. Bill Mitchell and Joan Muysken trace the theoretical analysis of the nature and causes of unemployment over the last 150 years and argue that the shift from involuntary to ‘natural rate’ conceptions of unemployment since the 1960s has driven an ideological backlash against Keynesian policy interventions.

Chapter 6: Inflation First: The New Mantra of Macroeconomics

William Mitchell and Joan Muysken

Subjects: economics and finance, labour economics

Extract

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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