A General Theory of Stagflation

Abstract

This paper presents an unconventional view of economics. It attempts to explain post–1973 stagflation – the combination of slower economic growth, higher unemployment, and higher inflation – in terms of a new paradigm that attaches central importance to the power of expectations. Several new concepts are developed – notably, the ‘decelerator’. ‘induced’ and ‘autonomous’ inflation, the ‘energy accelerator’ and the ‘energy mutiplier’. Using these concepts and supporting evidence, the paper shows how impending energy scarcity has created stagflation and how we can develop a possible escape route. The paradigm thus explains why, despite ideological differences, the East and West are hit by economic crises at the same time. The paper notes that the Third World has also been affected by the energy crisis, but not in exactly the same way as the First World. Finally, the paper argues that the present difficulties can be overcome only if macroeconomic management makes a subtle but, in its consequences, revolutionary adjustment in its central goals, and moves from the pursuit of growth, employment, price stability and social equity to the pursuit of sustainable growth, employment, price stability and social equity.