Podcast of Day- Boyer Lectures

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Lecture 2: From Golden Age to Stagflation
For the world's developed economies, the end of the second world war was the trigger for almost 30 years of sustained growth. Ian Macfarlane says the Keynesian system of economic management had served policy-makers well, but asks had Keynesian policies been pushed too far, beyond their natural limits? Inflation began to rise in all countries in the late 1960s and early 1970s. When the first OPEC oil shock occurred it would bring the post-war boom to a sudden close, and give rise to a new condition—stagflation. Some excerpts below;

“These economic developments and macroeconomic debates occurred in virtually all the developed countries. Nowhere were they more prominent than in the United Kingdom, where inflation had two peaks in excess of 20% per annum, during the 1970s and where the UK government finally had to go, cap in hand, to borrow from the IMF in 1976. Perhaps therefore it is fitting that former British Prime Minister, Jim Callaghan, be given the last word to sum up what he had learned from the economic turbulence of the 1970s. Callaghan said, and I will quote:

What is the cause of high employment? Quite simply, and unequivocally, it is caused by paying ourselves more than the value of what we produce. There are no scapegoats. That is as true in a mixed economy under a Labour government as it is under capitalism or communism. It is an absolute fact of life, which no government, be it left or right, can alter. We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting government spending. I tell you in all candour, that that option no longer exists, and that insofar as it ever did exist, it only worked on each occasion since the war, by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step. Higher inflation, followed by higher unemployment; we have just escaped from the highest rate of inflation this century has known; we have not yet escaped from the consequences, high unemployment. That is the history of the last 20 years.

To an economist, Callaghan's eloquent lament sounds very much like a lay-man's version of the dynamic instability engendered by attempts to exploit the Phillips Curve.”

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