Full Employment Abandoned
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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.
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Chapter 4: The Troublesome NAIRU: The Hoax that Undermined Full Employment

William Mitchell and Joan Muysken


4.1 INTRODUCTION In this chapter we complete our survey of the evolution of the concept of full employment and the currently accepted orthodox theoretical analyses of unemployment and its solutions. In Chapter 3, we argued that the concept of a trade-off between unemployment and inflation which can be traced back to classical days (see Chapter 2) was dominant in the economic debate from the late 1950s and into the 1960s. As a result, productive capacity and hence full employment became conditionally defined in terms of an appropriate inflation rate, and this allowed policy makers to shift away from a focus on full employment defined in terms of a number of jobs. However, given that inflation was not yet a problem, policy makers were able to maintain low levels of unemployment at acceptable inflation rates throughout this period. By the late 1960s, the Keynesian macroeconomic orthodoxy, which had dominated policy making since the end of the Second World War and had consistently delivered high-pressure economies (operating at or near capacity) was under siege from the resurgent natural rate theory. The natural rate approach, with its roots back in the pre-Keynesian quantity theory days, suggested that there was no legitimate role for aggregate demand management to maintain low unemployment rates. The only reasonable policy position was alleged to be one that kept monetary growth consistent with a stable inflation rate. The dynamics of unregulated labour markets would then ensure that the natural rate of unemployment...

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