ABSTRACT
INTRODUCTION Inflation dominated discussions of British economic policy in the 1970s. For governments, this involved trade unions and industrial relations, various forms of prices and incomes policies, control of the money supply, and general deflation. By 1975, the major issues were clear. Policy-makers were emphasising that ‘One man’s pay rise is not only another man’s price rise: it might also cost him his own job-or his neighbour’s job’.1 Inflation was seen as a cause of unemployment when Keynesian analysis expects unemployment to be associated with deflation. Observers of British economic policy with memories of the 1960s might well ask whatever happened to the Phillips curve? In the circumstances of the mid1970s, it was claimed that there were no doubts and disagreements about the Government’s objective function: the nation was ‘…united in insisting that the rise in the cost of living must be curbed. There is no difference of opinion about that’.2 As for the causes of the problem, public policy suggested that no ‘…reasonable person can put all the blame for runaway inflation on wage rises or trade unions. There are many other causes. There was the steep increase in 1972-3 in world costs of food and raw materials and the colossal rise in oil prices in 1973-4.’3 Such a statement is consistent with a supply side or cost-push hypothesis of inflation. Vote-maximising governments with a monopoly of the domestic money supply are understandably reluctant to reveal any causal involvement in inflation! To solve the problem, massive immediate cuts in state expenditure were rejected because they ‘… would have created mass unemployment and set back our chances of economic recovery through industrial growth. There was only one alternative: to tackle inflation by reducing our rate of increase in wages and salaries. Pay restraint will reduce inflation without sacrificing our long-term goals.’4 Such policy statements raise fascinating and controversial questions related to the methodology of economic policy. What, for example, is the underlying model of inflation and of the economy which can be deduced from such policy statements, especially those which relate to pay restraint and long-term goals? Are there any alternative models and, if so, what is the evidence on their relative explanatory powers and predictive accuracy?5 If inflation and unemployment are positively associated, has the Phillips curve collapsed? What is the evidence on the effectiveness of pay-restraint policies? Are they the apparently costless policy which is sometimes implied?
