The Fearsome Dilemma: Simultaneous Inflation and Unemployment

L. Richard Lund is a Ph.D. candidate in history at York University.

This book is a must-read for anyone who wants to understand the economic
problems that have plagued the industrialized world since the mid-1970s.


In its clearly written text, largely free of the excessive technical
language for which economists are notorious, McLeod argues that although
Keynesian economic policies worked quite well for more than 20 years
following World War II, Keynesians failed to see the danger posed by
low, yet persistent, worldwide inflation. In McLeod’s opinion, no rate
of continuous inflation is safe, because it gains momentum over time and
threatens to spiral out of control.

When just such a scenario unfolded in the 1970s, most governments
wisely decided to take action. Unfortunately, they took a monetarist or
neoclassical approach—which, instead of building on the previous
success of Keynesianism, actually embraced many of the failed
laissez-faire doctrines of the past. Consequently, the world’s leading
industrial nations used traditional methods to fight inflation, ushering
in 25 years of low growth, high unemployment, and large government
deficits—and, ironically, no end to rising prices.

McLeod insists that this disastrous neoclassical approach must be
replaced with policies that control inflation without reducing
employment or preventing the use of Keynesian techniques to stimulate
growth. The key to solving this “fearsome dilemma,” he claims, is to
prevent the total of all money incomes in the economy from increasing
more rapidly than total real output. In the process, however, essential
elements in the market system (such as the profit motive and the use of
price to allocate resources) cannot be undermined. McLeod therefore
opposes simple price controls but advocates a major package of reforms
that include, among other things, flexible wage and salary restraints, a
levy to reduce returns on investments during periods of rising prices,
and the elimination of a number of inflationary components in the
international monetary system.

Working out the details of these difficult and complex measures, or
devising even better programs, should, in McLeod’s view, constitute
the raison d’кtre of the economics profession. He rightly criticizes
many of his colleagues for focusing on other issues—issues that are
less important and less challenging—during the past 20 years.