Shifting Sands and Policy Failures
2.1 INTRODUCTION In the pre-Keynesian era, the concept of full employment only allowed for voluntary unemployment: employment was determined at the intersection of labour demand and supply which was the outcome of maximising, rational and voluntary decision making by workers and ﬁrms. However, in the immediate post-Second World War Keynesian era, the concept of full employment was recast and the emphasis became one of providing enough jobs to match the work preferences of the available labour force. Any remaining unemployment (frictions aside) was considered involuntary and due to the failure of the monetary economy to generate demand suﬃcient to meet the saving preferences of the private sector. The notion of involuntary unemployment was at the heart of this conception of full employment. That is, full employment coincided with zero involuntary unemployment. This post-Second World War consensus was steadily eroded away over the next 40 odd years. By the early to mid-1970s, mainstream macroeconomics reverted back to the pre-Keynesian notions of voluntary unemployment and eﬀectively abandoned the concept of true full employment. However, the process of abandonment began in the 1950s when the discussion turned to inﬂation and the trade-oﬀ between the twin evils of unemployment and inﬂation. This was the era in which the Phillips curve literature emerged (Phillips, 1958). For the concept of true full employment, however, it was the subsequent monetarist and new classical reinterpretation of the trade-oﬀ that was devastating. The classical (pre-Keynesian) notion of a natural unemployment rate (understood as being equivalent...
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