Stagflation

Background

Stagflation is a portmanteau of stagnation and inflation, describing an economic condition where there is a simultaneous increase in inflation and unemployment, combined with stagnant economic growth. Traditionally, inflation and unemployment were thought to be inversely related, a concept represented by the Phillips Curve. Stagflation challenges this view by presenting a scenario where both rise together.

Historical Context

Stagflation became widely recognized during the 1970s, particularly in the United States and many Western economies, following a series of oil shocks and economic policy missteps. The most notable period was the 1973-1975 and the later 1979-1980 oil crises, which created conditions for rising prices despite economic stagnation.

Definitions and Concepts

Stagflation refers to:

High Inflation: The sustained increase in the general price level of goods and services.
High Unemployment: A higher than usual level of unemployment where a significant portion of the population is unable to find work.
Stagnation: Very low or static economic growth, typically with GDP (Gross Domestic Product) growth significantly below potential output.

Major Analytical Frameworks

Classical Economics

Classical economists struggled with the concept of stagflation as it contradicted many traditional theories regarding inflation and economic growth.

Neoclassical Economics

Neoclassical economists viewed stagflation as a result of supply-side constraints, such as natural disasters or energy crises, driving prices up independently of consumer demand.

Keynesian Economics

Keynesian economists believed that stagflation could be due to wage-price spirals and supply shocks. They generally prescribed macroeconomic policies aimed at reducing demand through fiscal discipline or addressing supply issues.

Marxian Economics

Marxian economists interpret stagflation as a symptom of the inherent contradictions within capitalist economies, where crises periodically erupt due to the capitalist production methods.

Institutional Economics

Institutionalists would examine stagflation by focusing on changing power relations, labor market institutions, and the role of key industries, such as the oil sector during the 1970s.

Behavioral Economics

Behavioral economics might explore how consumer and producer perceptions and expectations can perpetuate stagflation. For example, inflationary expectations can adjust behaviors, compounding the problem.

Post-Keynesian Economics

Post-Keynesians tend to explore the distributive importance of power, financial systems, production structures, and the interconnectedness of inflationary and unemployment pressures in describing stagflation.

Austrian Economics

Austrians argue that stagflation results from excessive monetary manipulation and interference in the market processes, advocating for minimal government intervention.

Development Economics

For developing economies, stagflation can often arise from structural challenges like dependency on commodity exports and limited industrial bases combined with population pressures.

Monetarism

Monetary economists focus on the role of monetary policy, particularly the oversupply of money as a root cause of inflation, coupled often with constraints on policy effectiveness in addressing unemployment.

Comparative Analysis

Case studies of stagflation commonly compare Western economies in the 1970s, such as the USA and the UK. This comparative analysis helps understand different policy responses and their effectiveness in taming stagflation.

Case Studies

United States (1970s)
United Kingdom (1970s)
European oil crisis impact

Suggested Books for Further Studies

“Stagflation: Origins and Implications” by Michael R. Darby, James R. Lothian.
“Macroeconomic Theory and Policymaking” by Jagdish Handa.
“The Age of Stagflation: A Review” by Robert J. Gordon.
“Inflation and Unemployment: The Evolution of an Idea” by Peter R. Orszag, Philip A. Swagel.

Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.
Unemployment: The situation where individuals capable of working, and actively seeking work, are unable to find employment.
Phillips Curve: An economic concept illustrating an inverse relationship between the rate of unemployment and the rate of inflation within an economy.
Supply Shock: An event that suddenly increases or decreases the supply of a commodity or service, affecting prices.
Monetary Policy: Policies laid down by the central bank to manage the supply of money and interest rates.