Development and Underdevelopment in the History of Economic Thought

The rise and fall of the creeping inflation: economic ideas and policy in the US during the Golden Age.

Spinato Morlin Guilherme, University of Siena

A quite peculiar inflationary process arose in the decades following the Second World War in advanced capitalist economies, with moderate and persistent rates of inflation. This creeping inflation stimulated important debates, evoking a confrontation between cost-push and demand-pull views. The challenge of containing inflation without harming employment lead to the search of alternative stabilization policies (as incomes policy), nowadays forgotten. The aim of the paper is to dive in the controversy regarding the creeping inflation in the United States during the 1950s and 1960s, reviewing the different interpretations to this phenomenon and the distinct policy recommendations. During this period, Neoclassical Synthesis shaped economic reasoning through a somewhat disjointed combination of Keynesian macroeconomics with neoclassical microeconomics. This merger of conflicting ideas had important consequences in the analysis of inflation. In this sense, the rise in wages and prices before a situation of excess of demand in the economy (i.e., below full employment) puzzled experts. Thus, cost-push interpretations spread among researchers and policymakers, what required the development of a new framework for operating anti-inflation policy. Another puzzle regarded the dispute between recommendations of tolerance or intolerance with respect to inflation. From a political economy perspective (inspired in modern theory of cost-push inflation), acceptance of moderate rates of inflation in the name of higher employment had beneficial consequences for labor, sustaining workers’ bargaining position and wage growth. Hence, reassessing this debate in light of modern heterodox macroeconomics can bring stimulating ideas for both theory and policy, usually obfuscated by the dominance of accelerationist Phillips Curve (with its exclusively demand-pull inflation) inaugurated in the 1970s and maintained in the New Consensus.

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Keywords: creeping inflation; incomes policy; Golden Age

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