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 5: The Shift to Full Employability

William Mitchell and Joan Muysken


INTRODUCTION In Chapter 3 we traced the route that natural rate economists took in resisting the Keynesian consensus in the post-Second World War period. Their attempts were bolstered in the late 1960s by the inflationary impulses associated with the Vietnam War which provided opportunities for natural rate economists to attack activist macroeconomic policy. However the paradigm break, and the resurgence of pre-Keynesian (natural rate) thinking, came with the economic dislocation that followed the first oil price rise in 1974 and the resulting international inflation surge (Thurow, 1983). As explained in Chapter 3, the natural rate approach redefined full employment in terms of a unique unemployment rate (the NAIRU) where inflation is stable. The NAIRU is determined by supply forces and is invariant to Keynesian demand-side policies. The approach alleged that free markets guarantee full employment and Keynesian attempts to drive unemployment below the NAIRU will ultimately be self-defeating and inflationary. The Keynesian notion that unemployment represents a macroeconomic failure that can be addressed by expansionary fiscal and/or monetary policy was categorically rejected, with little resistance offered by those who had advocated this position over many years. Instead, the new macroeconomic orthodoxy was built on the assertion that unemployment reflects supply failures such as poor incentive structures facing individuals as a result of welfare provision, skill mismatches and excessive government regulations (OECD, 1994). Extreme versions of the natural rate hypothesis consider unemployment to be voluntary and the outcome of optimising choices by individuals between...

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