Fifteen years after the Global Financial Crisis: Recessions and Business Cycles in the History of Economic Thought

Walking down a narrow path

Paesani Paolo, University of Rome Tor Vergata
Palumbo Antonella, Università Roma Tre Department of Economics

The focus on how to achieve and maintain high levels of employment characterised much of the policy debate in the late 1930s and the 1940s, and was especially crucial in connection with the spreading of Keynesianism in the USA. In this context, many prominent US economists, with their different views on Keynes and Keynesian economics, debated the notion of full employment from a theoretical and empirical point of view. This paper reconstructs these debates, focusing on three closely related issues: stability vs instability of full employment, statistical measurement and the links between full employment and stable prices. We analyse these issues both by contrasting the different analytical treatments they received from American Keynesianism and from other theoretical approaches that also had significant weight in the debate; and, above all, by noting the plurality of analyses and interpretations within American Keynesianism itself. In this latter regard, we particularly focus on the issue of the relationship between full employment and inflation, which became increasingly relevant and controversial in the late 1940s and 1950s as fears of post-war stagnation receded and inflation resurfaced. While some economists argued for the compatibility of ambitious employment targets and stable prices, as long as productive capacity expanded at a brisk pace, other authors, many of them influential in economic policy circles, argued that price stability required the adoption of less ambitious employment targets. We argue in this paper that this illustrates the existence, in the debates of the time and before the formulation of the Phillips curve, of an embryonic notion of inflation-unemployment trade-off, which paved the way for the later analysis famously proposed by Samuelson and Solow (1960).

Area: Eshet Conference

Keywords: full employment; American Keynesianism; inflation; unemployment

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