Shifting Sands and Policy Failures
Chapter 4: The Troublesome NAIRU: The Hoax that Undermined Full Employment
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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