In economics, stagflation, or recession-inflation, is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment, and vice versa.

The term, a portmanteau of stagnation and inflation, is generally attributed to Iain Macleod, a British Conservative Party politician who became Chancellor of the Exchequer in 1970. Macleod used the word in a 1965 speech to Parliament during a period of simultaneously high inflation and unemployment in the United Kingdom.[1][2][3][4]

Warning the House of Commons of the gravity of the situation, he said:

"We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of "stagflation" situation. And history, in modern terms, is indeed being made."[3][5]

Macleod used the term again on 7 July 1970, and the media began also to use it, for example in The Economist on 15 August 1970, and Newsweek on 19 March 1973.

John Maynard Keynes did not use the term, but some of his work refers to the conditions that most would recognise as stagflation. In the version of Keynesian macroeconomic theory that was dominant between the end of World War II and the late 1970s, inflation and recession were regarded as mutually exclusive, the relationship between the two being described by the Phillips curve. Stagflation is very costly and difficult to eradicate once it starts, both in social terms and in budget deficits.

The Great Inflation

The term stagflation, a portmanteau of stagnation and inflation, was first coined during a period of inflation and unemployment in the United Kingdom. The United Kingdom experienced an outbreak of inflation in the 1960s and 1970s.

In a Bank of England working papers series, article authors Edward Nelson and Kalin Nikolov (2002) examined causes and policy errors related to the Great Inflation in the United Kingdom in the 1970s, arguing that as inflation rose in the 1960s and 1970s, UK policy makers failed to recognize the primary role of monetary policy in controlling inflation. Instead, they attempted to use non-monetary policies and devices to respond to the economic crisis. Policy makers also made "inaccurate estimates of the degree of excess demand in the economy, [which] contributed significantly to the outbreak of inflation in the United Kingdom in the 1960s and 1970s.[3]

Stagflation was not limited to the United Kingdom, however. Economists have shown that stagflation was prevalent among seven major economies from 1973 to 1982.[6] After inflation rates began to fall in 1982, economists' focus shifted from the causes of stagflation to the "determinants of productivity growth and the effects of real wages on the demand for labor."[6]


Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when the economy faces a supply shock, such as a rapid increase in the price of oil. An unfavorable situation like that tends to raise prices at the same time as it slows economic growth by making production more costly and less profitable.[7][8][9][10]

Second, the government can cause stagflation if it creates policies that harm industry while growing the money supply too quickly. These two things would probably have to occur simultaneously because policies that slow economic growth do not usually cause inflation, and policies that cause inflation do not usually slow economic growth.

Both explanations are offered in analyses of the global stagflation of the 1970s. It began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a price/wage spiral.[11]

Postwar Keynesian and monetarist views

Early Keynesianism and monetarism

Up to the 1960s, many Keynesian economists ignored the possibility of stagflation, because historical experience suggested that high unemployment was typically associated with low inflation, and vice versa (this relationship is called the Phillips curve). The idea was that high demand for goods drives up prices, and also encourages firms to hire more; and likewise high employment raises demand. However, in the 1970s and 1980s, when stagflation occurred, it became obvious that the relationship between inflation and employment levels was not necessarily stable: that is, the Phillips relationship could shift. Macroeconomists became more skeptical of Keynesian theories, and Keynesians themselves reconsidered their ideas in search of an explanation for stagflation.[12]

The explanation for the shift of the Phillips curve was initially provided by the monetarist economist Milton Friedman, and also by Edmund Phelps. Both argued that when workers and firms begin to expect more inflation, the Phillips curve shifts up (meaning that more inflation occurs at any given level of unemployment). In particular, they suggested that if inflation lasted for several years, workers and firms would start to take it into account during wage negotiations, causing workers' wages and firms' costs to rise more quickly, thus further increasing inflation. While this idea was a severe criticism of early Keynesian theories, it was gradually accepted by most Keynesians, and has been incorporated into New Keynesian economic models.


Neo-Keynesian theory distinguished two distinct kinds of inflation: demand-pull (caused by shifts of the aggregate demand curve) and cost-push (caused by shifts of the aggregate supply curve). Stagflation, in this view, is caused by cost-push inflation. Cost-push inflation occurs when some force or condition increases the costs of production. This could be caused by government policies (such as taxes) or from purely external factors such as a shortage of natural resources or an act of war.

Contemporary Keynesian analyses argue that stagflation can be understood by distinguishing factors that affect aggregate demand from those that affect aggregate supply. While monetary and fiscal policy can be used to stabilise the economy in the face of aggregate demand fluctuations, they are not very useful in confronting aggregate supply fluctuations. In particular, an adverse shock to aggregate supply, such as an increase in oil prices, can give rise to stagflation.[13]

Supply theory


Supply theories[14] are based on the neo-Keynesian cost-push model and attribute stagflation to significant disruptions to the supply side of the supply-demand market equation, for example, when there is a sudden real or relative scarcity of key commodities, natural resources, or natural capital needed to produce goods and services. Other factors may also cause supply problems, for example, social and political conditions such as policy changes, acts of war, extremely restrictive government control of production. In this view, stagflation is thought to occur when there is an adverse supply shock (for example, a sudden increase in the price of oil or a new tax) that causes a subsequent jump in the "cost" of goods and services (often at the wholesale level). In technical terms, this results in contraction or negative shift in an economy's aggregate supply curve.

In the resource scarcity scenario (Zinam 1982), stagflation results when economic growth is inhibited by a restricted supply of raw materials.[15][16] That is, when the actual or relative supply of basic materials (fossil fuels (energy), minerals, agricultural land in production, timber, etc.) decreases and/or cannot be increased fast enough in response to rising or continuing demand. The resource shortage may be a real physical shortage, or a relative scarcity due to factors such as taxes or bad monetary policy influencing the "cost" or availability of raw materials. This is consistent with the cost-push inflation factors in neo-Keynesian theory (above). The way this plays out is that after supply shock occurs, the economy first tries to maintain momentum. That is, consumers and businesses begin paying higher prices to maintain their level of demand. The central bank may exacerbate this by increasing the money supply, by lowering interest rates for example, in an effort to combat a recession. The increased money supply props up the demand for goods and services, though demand would normally drop during a recession.

In the Keynesian model, higher prices prompt increases in the supply of goods and services. However, during a supply shock (i.e., scarcity, "bottleneck" in resources, etc.), supplies do not respond as they normally would to these price pressures. So, inflation jumps and output drops, producing stagflation.

Explaining the 1970s stagflation

Following Richard Nixon's imposition of wage and price controls on 15 August 1971, an initial wave of cost-push shocks in commodities were blamed for causing spiraling prices. The second major shock was the 1973 oil crisis, when the Organization of Petroleum Exporting Countries (OPEC) constrained the worldwide supply of oil.[17] Both events, combined with the overall energy shortage that characterized the 1970s, resulted in actual or relative scarcity of raw materials. The price controls resulted in shortages at the point of purchase, causing, for example, queues of consumers at fuelling stations and increased production costs for industry.[18]

Recent views

Through the mid-1970s, it was alleged that none of the major macroeconomic models (Keynesian, New Classical, and monetarist) were able to explain stagflation.[19]

Later, an explanation was provided based on the effects of adverse supply shocks on both inflation and output.[20] According to Blanchard (2009), these adverse events were one of two components of stagflation; the other was "ideas"—which Robert Lucas (famous for the Lucas supply curve), Thomas Sargent, and Robert Barro were cited as expressing as "wildly incorrect" and "fundamentally flawed" predictions (of Keynesian economics) which, they said, left stagflation to be explained by "contemporary students of the business cycle."[21] In this discussion, Blanchard hypothesizes that the recent oil price increases could trigger another period of stagflation, although this has not yet happened (pg. 152).

Neoclassical views

A purely neoclassical view of the macroeconomy rejects the idea that monetary policy can have real effects.[22] Neoclassical macroeconomists argue that real economic quantities, like real output, employment, and unemployment, are determined by real factors only. Nominal factors like changes in the money supply only affect nominal variables like inflation. The neoclassical idea that nominal factors cannot have real effects is often called monetary neutrality[23] or also the classical dichotomy.

Since the neoclassical viewpoint says that real phenomena like unemployment are essentially unrelated to nominal phenomena like inflation, a neoclassical economist would offer two separate explanations for 'stagnation' and 'inflation'. Neoclassical explanations of stagnation (low growth and high unemployment) include inefficient government regulations or high benefits for the unemployed that give people less incentive to look for jobs. Another neoclassical explanation of stagnation is given by real business cycle theory, in which any decrease in labour productivity makes it efficient to work less. The main neoclassical explanation of inflation is very simple: it happens when the monetary authorities increase the money supply too much.[24]

In the neoclassical viewpoint, the real factors that determine output and unemployment affect the aggregate supply curve only. The nominal factors that determine inflation affect the aggregate demand curve only.[25] When some adverse changes in real factors are shifting the aggregate supply curve left at the same time that unwise monetary policies are shifting the aggregate demand curve right, the result is stagflation.

Thus the main explanation for stagflation under a classical view of the economy is simply policy errors that affect both inflation and the labour market. Ironically, a very clear argument in favour of the classical explanation of stagflation was provided by Keynes himself. In 1919, John Maynard Keynes described the inflation and economic stagnation gripping Europe in his book The Economic Consequences of the Peace. Keynes wrote:

"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some." [...]
"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

Keynes explicitly pointed out the relationship between governments printing money and inflation.

"The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance."

Keynes also pointed out how government price controls discourage production.

"The presumption of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. If a man is compelled to exchange the fruits of his labours for paper which, as experience soon teaches him, he cannot use to purchase what he requires at a price comparable to that which he has received for his own products, he will keep his produce for himself, dispose of it to his friends and neighbours as a favour, or relax his efforts in producing it. A system of compelling the exchange of commodities at what is not their real relative value not only relaxes production, but leads finally to the waste and inefficiency of barter."

Keynes detailed the relationship between German government deficits and inflation.

"In Germany the total expenditure of the Empire, the Federal States, and the Communes in 1919–20 is estimated at 25 milliards of marks, of which not above 10 milliards are covered by previously existing taxation. This is without allowing anything for the payment of the indemnity. In Russia, Poland, Hungary, or Austria such a thing as a budget cannot be seriously considered to exist at all."
"Thus the menace of inflationism described above is not merely a product of the war, of which peace begins the cure. It is a continuing phenomenon of which the end is not yet in sight."

Keynesian in the short run, classical in the long run

While most economists believe that changes in money supply can have some real effects in the short run, neoclassical and neo-Keynesian economists tend to agree that there are no long-run effects from changing the money supply. Therefore, even economists who consider themselves neo-Keynesians usually believe that in the long run, money is neutral. In other words, while neoclassical and neo-Keynesian models are often seen as competing points of view, they can also be seen as two descriptions appropriate for different time horizons. Many mainstream textbooks today treat the neo-Keynesian model as a more appropriate description of the economy in the short run, when prices are 'sticky', and treat the neoclassical model as a more appropriate description of the economy in the long run, when prices have sufficient time to adjust fully.

Therefore, while mainstream economists today might often attribute short periods of stagflation (not more than a few years) to adverse changes in supply, they would not accept this as an explanation of very prolonged stagflation. More prolonged stagflation would be explained as the effect of inappropriate government policies: excessive regulation of product markets and labor markets leading to long-run stagnation, and excessive growth of the money supply leading to long-run inflation.

Alternative views

As differential accumulation

Political economists Jonathan Nitzan and Shimshon Bichler have proposed an explanation of stagflation as part of a theory they call differential accumulation, which says firms seek to beat the average profit and capitalisation rather than maximise. According to this theory, periods of mergers and acquisitions oscillate with periods of stagflation. When mergers and acquisitions are no longer politically feasible (governments clamp down with anti-monopoly rules), stagflation is used as an alternative to have higher relative profit than the competition. With increasing mergers and acquisitions, the power to implement stagflation increases.

Stagflation appears as a societal crisis, such as during the period of the oil crisis in the 70s and in 2007 to 2010. Inflation in stagflation, however, doesn't affect all firms equally. Dominant firms are able to increase their own prices at a faster rate than competitors. While in the aggregate no one appears to profit, differentially dominant firms improve their positions with higher relative profits and higher relative capitalisation. Stagflation is not due to any actual supply shock, but because of the societal crisis that hints at a supply crisis. It is mostly a 20th and 21st century phenomenon that has been mainly used by the "weapondollar-petrodollar coalition" creating or using Middle East crises for the benefit of pecuniary interests.[26]

Demand-pull stagflation theory

Demand-pull stagflation theory explores the idea that stagflation can result exclusively from monetary shocks without any concurrent supply shocks or negative shifts in economic output potential. Demand-pull theory describes a scenario where stagflation can occur following a period of monetary policy implementations that cause inflation. This theory was first proposed in 1999 by Eduardo Loyo of Harvard University's John F. Kennedy School of Government.[27]

Supply-side theory

Supply-side economics emerged as a response to US stagflation in the 1970s. It largely attributed inflation to the ending of the Bretton Woods system in 1971 and the lack of a specific price reference in the subsequent monetary policies (Keynesian and Monetarism). Supply-side economists asserted that the contraction component of stagflation resulted from an inflation-induced rise in real tax rates (see bracket creep)

Austrian School of economics

Adherents to the Austrian School maintain that creation of new money ex nihilo benefits the creators and early recipients of the new money relative to late recipients. Money creation is not wealth creation; it merely allows early money recipients to outbid late recipients for resources, goods, and services. Since the actual producers of wealth are typically late recipients, increases in the money supply weakens wealth formation and undermines the rate of economic growth. Says Austrian economist Frank Shostak:

"The increase in the money supply rate of growth coupled with the slowdown in the rate of growth of goods produced is what the increase in the rate of price inflation is all about. (Note that a price is the amount of money paid for a unit of a good.) What we have here is a faster increase in price inflation and a decline in the rate of growth in the production of goods. But this is exactly what stagflation is all about, i.e., an increase in price inflation and a fall in real economic growth. Popular opinion is that stagflation is totally made up. It seems therefore that the phenomenon of stagflation is the normal outcome of loose monetary policy. This is in agreement with [Phelps and Friedman (PF)]. Contrary to PF, however, we maintain that stagflation is not caused by the fact that in the short run people are fooled by the central bank. Stagflation is the natural result of monetary pumping which weakens the pace of economic growth and at the same time raises the rate of increase of the prices of goods and services."[28]

Jane Jacobs and the influence of cities on stagflation

In 1984, journalist and activist Jane Jacobs proposed the failure of major macroeconomic theories[notes 1] to explain stagflation was due to their focus on the nation as the salient unit of economic analysis, rather than the city.[29] She proposed that the key to avoiding stagflation was for a nation to focus on the development of "import-replacing cities" that would experience economic ups and downs at different times, providing overall national stability and avoiding widespread stagflation. According to Jacobs, import-replacing cities are those with developed economies that balance their own production with domestic imports—so they can respond with flexibility as economic supply and demand cycles change. While lauding her originality, clarity, and consistency, urban planning scholars have criticized Jacobs for not comparing her own ideas to those of major theorists (e.g., Adam Smith, Karl Marx) with the same depth and breadth they developed, as well as a lack of scholarly documentation.[30] Despite these issues, Jacobs' work is notable for having widespread public readership and influence on decision-makers.[31]


Stagflation undermined support for the Keynesian consensus.

Federal Reserve chairman Paul Volcker very sharply increased interest rates from 1979–1983 in what was called a "disinflationary scenario." After U.S. prime interest rates had soared into the double-digits, inflation did come down; these interest rates were the highest long-term prime interest rates that had ever existed in modern capital markets.[32] Volcker is often credited with having stopped at least the inflationary side of stagflation, although the American economy also dipped into recession. Starting in approximately 1983, growth began a recovery. Both fiscal stimulus and money supply growth were policy at this time. A five- to six-year jump in unemployment during the Volcker disinflation suggests Volcker may have trusted unemployment to self-correct and return to its natural rate within a reasonable period.

See also


  1. ^ including those of Adam Smith, Karl Marx, John Stuart Mill, John Maynard Keynes, Irving Fisher, and Milton Friedman


  1. ^ Online Etymology Dictionary Douglas Harper, Historian. (accessed 5 May 2007).
  2. ^ House of Commons Official Report (also known as Hansard), 17 November 1965, page 1,165.
  3. ^ a b c Edward Nelson; Kalin Nikolov (2002). Bank of England Working Paper (PDF) (Report).Introduction, page 9.
  4. ^ N. Gregory Mankiw (25 September 2008). Principles of Macroeconomics. Cengage Learning. p. 464. ISBN 0-324-58999-9.
  5. ^ Kollewe, Julia (15 February 2011). "Inflation: what you need to know". UK: The Guardian. Archived from the original on 4 December 2013.
  6. ^ a b Helliwell, John (March 1988). "Comparative Macroeconomics of Stagflation". Journal of Economic Literature. 26 (1): 1–28. JSTOR 2726607.
  7. ^ J. Bradford DeLong (3 October 1998). "Supply Shocks: The Dilemma of Stagflation". University of California at Berkeley. Archived from the original on 9 May 2008. Retrieved 24 January 2008.
  8. ^ Burda, Michael; Wyplosz, Charles (1997). "Macroeconomics: A European Text, 2nd ed". Oxford University Press: 338–339.
  9. ^ Hall, Robert; John Taylor (1986). Macroeconomics: Theory, Performance, and Policy. Norton. ISBN 0-393-95398-X.
  10. ^ Macroeconomics: Principles and Policy, 13th edition, "Ch. 10 Bringing in the Supply Side: Unemployment and Inflation?", William J. Baumol, Alan S. Blinder, Cengage Learning, 2012, 2016.
  11. ^ Barsky, Robert; Kilian, Lutz (2000). "A Monetary Explanation of the Great Stagflation of the 1970s" (PDF). University of Michigan.
  12. ^ Blanchard (2000), op. cit., Chap. 28, p. 541.
  13. ^ Abel, Andrew; Ben Bernanke; Andrew Abel (1995). "Chap. 11". Macroeconomics (2nd ed.). Addison-Wesley. ISBN 0-201-54392-3.
  14. ^ Bronfenbrenner, Martin (1976). "Elements of Stagflation Theory". Zeitschrift für Nationalökonomie. 36: 1–8. doi:10.1007/BF01283912.
  15. ^ Smith, V.Kerry (1979). "Scarcity and Growth Reconsidered". Johns Hopkins Press for Resources for the Future.
  16. ^ Krautkraemer, Jeffrey (March 2002). "ECONOMICS OF SCARCITY: STATE OF THE DEBATE". Washington State University.
  17. ^ "Over a Barrel". Time Magazine. 3 October 1983. Retrieved 24 May 2010.
  18. ^ ("Panic at the Pump". Time Magazine. 14 January 1974. Retrieved 24 May 2010.
  19. ^ Helliwell, John. "Comparative Macroeconomics of Stagflation". Journal of Economic Literature. 26 (1): 4.
  20. ^ Blanchard, Olivier (2009). Macroeconomics (Instructor's Review Copy) (5th ed.). Prentice Hall. pp. 152, 583, 584, G–9. ISBN 0-13-013306-X.
  21. ^ Blanchard, Olivier (2009). Macroeconomics (Instructor's Review Copy) (5th ed.). Prentice Hall. pp. 153, 583, G–9. ISBN 0-13-013306-X.
  22. ^ Abel & Bernanke (1995), op. cit., Ch. 11.
  23. ^ Abel & Bernanke (1995), op. cit., Ch. 11, pp. 378–9.
  24. ^ Barro, Robert; Vittorio Grilli (1994). European Macroeconomics. Macmillan. p. 139. ISBN 0-333-57764-7.Ch. 8, Fig. 8.1.
  25. ^ Abel & Bernanke (1995), Ch. 11, pp. 376–7.
  26. ^ Nitzan, Jonathan (June 2001). "Regimes of differential accumulation: mergers, stagflation and the logic of globalization". Review of International Political Economy. 8 (2): 226–274. doi:10.1080/09692290010033385.
  27. ^ Loyo, Eduardo (June 1999). "Demand-Pull Stagflation (Draft Working Paper)". National Bureau of Economic Research New Working Papers.[1]
  28. ^ Frank Shostak (10 October 2006). "Did Phelps Really Explain Stagflation?". Mises Daily. Ludwig von Mises Institute. Retrieved February 2011. Check date values in: |accessdate= (help)
  29. ^ Jacobs, Jane (1984). Cities and the Wealth of Nations. New York: Random House. ISBN 0394480473.
  30. ^ Hill, David (1988). "Jane Jacobs' Ideas on Big, Diverse Cities: A Review and Commentary". Journal of the American Planning Association. 54 (3): 302–314. doi:10.1080/01944368808976491.
  31. ^ Hill, David (1988). "Jane Jacobs' Ideas on Big, Diverse Cities: A Review and Commentary". Journal of the American Planning Association. 54 (3): 312. doi:10.1080/01944368808976491.
  32. ^ (Homer, Sylla & Sylla 1996, p. 1)

Further reading

1973–75 recession

The 1973–75 recession or 1970s recession was a period of economic stagnation in much of the Western world during the 1970s, putting an end to the overall Post–World War II economic expansion. It differed from many previous recessions by being a stagflation, where high unemployment and high inflation existed simultaneously.

1981 United Kingdom budget

The 1981 United Kingdom budget was delivered by Geoffrey Howe, the then Chancellor of the Exchequer, to the House of Commons on 10 March 1981. It was Geoffrey Howe's second budget and the second of the first Thatcher ministry. The budget represented a strongly monetarist response to the stagflation and high government borrowing which the UK was suffering at the time. The budget speech lasted for 91 minutes.

Anthony Barber

Anthony Perrinott Lysberg Barber, Baron Barber, TD, PC, DL (4 July 1920 – 16 December 2005) was a British Conservative politician who served as Chancellor of the Exchequer.

After serving in both the Territorial Army and the Royal Air Force during the Second World War, Barber studied at Oxford and became a barrister. Elected as MP for Doncaster in 1951, Barber held various posts in government under Harold Macmillan, including Economic Secretary to the Treasury, Financial Secretary to the Treasury and Minister of Health. After losing his seat in 1964, he won the 1965 by-election in Altrincham and Sale and returned to Parliament.

Barber was appointed as Chancellor of the Exchequer by Edward Heath in 1970, and oversaw a major liberalisation of the banking system, replaced purchase tax and Selective Employment Tax with Value Added Tax, and also relaxed exchange controls. During his term the economy suffered due to stagflation and industrial unrest, including a miners strike which led to the Three-Day Week. In 1972 he delivered a budget which was designed to return the Conservatives to power in an election expected in 1974 or 1975. This budget led to a period known as "The Barber Boom". The measures in the budget led to high inflation and wage demands from public sector workers. He was forced to introduce anti-inflation measures, along with a Prices Commission and a Pay Board. After the Conservatives lost the first election in 1974, he did not stand in the second election of that year. Barber became Chairman of Standard Chartered Bank until 1987 and died in 2005.

Differential accumulation

Differential accumulation is an approach for analysing capitalist development and crisis, tying together mergers and acquisitions, stagflation and globalization as integral facets of accumulation. The concept has been developed by Jonathan Nitzan and Shimshon Bichler.

The concept of differential accumulation emphasizes the powerful drive by dominant capital groups to beat the average and exceed the normal rate of return. This concept is tied to a definition of capital as a social category rather than a material category (as seen by neo-classical thinkers). "Capitalism is not an ‘economic system’, but a whole social order, and its principal category of capital must therefore have an ‘encompassing’ definition."

...capitalization is a forward-looking process. What is being accumulated are claims on the future flow of profit. The pace of accumulation therefore depends on two factors: (a) the institutional arrangements affecting profit expectations; and (b) the normal rate of return used to discount them into their present value. The effect of rising industrial capacity on these factors is not only highly complex and possibly non-linear, but its direction can be positive as well as negative.

But then if capital is not ‘tangible’, how should its accumulation be measured? Surely, the mere augmentation of money values tells us little about power, particularly in the presence of inflation or deflation. The answer is rooted in the relative nature of power. The power of the absentee owner is the power to control part of the social process, and that becomes meaningful primarily against the power of other owners.

Economic history of Pakistan

Since the country's independence in 1947, the economy of Pakistan has emerged as a semi-industrialized one, based heavily on textiles, agriculture, and food production, though recent years have seen a push towards technological diversification. Pakistan's GDP growth has been gradually on the rise since 2012 and the country has made significant improvements in its provision of energy and security. However, decades of corruption and internal political conflict have usually led to low levels of foreign investment and underdevelopment.Historically, the land forming modern-day Pakistan was home to the ancient Indus Valley Civilization from 2800 BC to 1800 BC, and evidence suggests that its inhabitants were skilled traders. Although the subcontinent enjoyed economic prosperity during the Mughal era, growth steadily declined during the British colonial period. Since independence, economic growth has meant an increase in average income of about 150 percent from 1950–96. But Pakistan, like many other developing countries, has not been able to narrow the gap between itself and rich industrial nations, which have grown faster on a per head basis. Per capita GNP growth rate from 1985–95 was only 1.2 percent per annum, substantially lower than India (3.2), Bangladesh (2.1), and Sri Lanka (2.6). The inflation rate in Pakistan has averaged 7.99 percent from 1957 until 2015, reaching an all-time high of 37.81 percent in December 1973 and a record low of -10.32 percent in February 1959. Pakistan suffered its only economic decline in GDP between 1951 and 1952.Overall, Pakistan has maintained a fairly healthy and functional economy in the face of several wars, changing demographics, and transfers of power between civilian and military regimes, growing at an impressive rate of 6 percent per annum in the first four decades of its existence. During the 1960s, Pakistan was seen as a model of economic development around the world, and there was much praise for its rapid progress. Many countries sought to emulate Pakistan's economic planning strategy, including South Korea, which replicated the city of Karachi's second "Five-Year Plan."

Economic liberalisation in Pakistan

The Economic liberalisation in Pakistan refers to a policy measure programme in order to promote and accelerate the economic independence and development in the economic context of history of Pakistan. Started in different times in the history of the country, the programme was intended and had mainstream goal to promote GDP growth for the national economy and economical and social values in the country.

This programme was first conceived in early 1980s and thoroughly studied by the ministry of finance led by finance ministers Ghulam Ishaq Khan and Mahbub-ul-Haq and was implemented first by Pakistan Muslim League and the Prime minister Nawaz Sharif, as part of the privatisation programme in 1990. The programme of economic liberalisation, as one of the counter-policy measure programme, came in a direct response to nationalization programme of Pakistan Peoples Party (PPP) in the 1970s. After the 1993 general elections, the programme was halted and reversed by Prime minister Benazir Bhutto and the Peoples Party after the Pressler amendment went into complete effect and force, that led the economic and financial crises in Pakistan. A much powerful socialist capitalism version was adopted in order to secure the revenue and financial capital of existing state-owned enterprises, with enforcement of nationalisation and privatisation at once. Second attempt was again attempted by the Pakistan Muslim League and Prime minister Nawaz Sharif after securing exclusive mandate during the 1997 general elections, however abruptly terminated the programme after weapon-test performances in Chagai weapons-testing laboratories in 1998 (See Chagai-I and Chagai-II) and the Karilg debacle in 1999.

Once again, the comprehensive and much more effective studies were conducted by then-Finance minister and Prime minister Shaukat Aziz in 2000 after assuming the charge of national economy as an aftermath of 1999 coup d'état. The fruits of liberalisation reached their peak in 2003–04 when Pakistan recorded its highest national GDP growth to 8.96%~9.9%. In 2008-10, Pakistan is ranked 47th largest in the world in nominal terms and 27th largest in the world in terms of purchasing power parity (PPP).

Economic stagnation

Economic stagnation is a prolonged period of slow economic growth (traditionally measured in terms of the GDP growth), usually accompanied by high unemployment. Under some definitions, "slow" means significantly slower than potential growth as estimated by macroeconomists, even though the growth rate may be nominally higher than in other countries not experiencing economic stagnation.

Edgar Fiedler

Edgar Russell Fiedler (April 21, 1929 – March 15, 2003) was an American economist who served as Vice President of The Conference Board and as Assistant Secretary of the Treasury for Economic Policy (1971 - 1975) during the presidencies of Richard Nixon and Gerald Ford. He authored "The Roots of Stagflation".

History of North America

History of North America encompasses the past developments of people populating the continent of North America. While it was widely believed that continent first became a human habitat when people migrated across the Bering Sea 40,000 to 17,000 years ago, recent discoveries may have pushed those estimates back at least another 90,000 years. Regardless, migrants settled in many locations on the continent, from the Inuit of the far north to the Mayans and Aztecs of the south. These isolated communities each developed their own unique ways of life and cultures, and their interaction with one another was limited in comparison to the extensive trade and conflict of civilizations across the Atlantic in Europe and Asia.

Records of European travel to North America begin with the Norse in the tenth century CE. In 985, they founded a settlement on Greenland (an often-overlooked part of North America) that persisted until the early 1400s. They also explored the east coast of Canada, but their settlements there were much smaller and shorter-lived. With the Age of Exploration and the voyages of Christopher Columbus (starting 1492), Europeans began to arrive in the Americas in large numbers and to develop colonial ambitions for both North and South America. Columbus' "discovery" of America is a contested idea because the Americas were already heavily populated by the indigenous Native American peoples, who had developed distinctive civilizations in their own right. After Columbus, influxes of Europeans soon followed and overwhelmed the native population. North America became a staging ground for ongoing European rivalries. The continent was divided by three prominent European powers: England, France, and Spain. The influences of colonization by these states on North American cultures are still apparent today.

Conflict over resources on North America ensued in various wars between these powers, but, gradually, the new European colonies developed desires for independence. Revolutions, such as the American Revolution and Mexican War of Independence, created new, independent states that came to dominate North America. The Canadian Confederation formed in 1867, creating the modern political landscape of North America.

From the 19th to 21st centuries, North American states have developed increasingly deeper connections with each other. Although some conflicts have occurred, the continent has for the most part enjoyed peace and general cooperation between its states, as well as open commerce and trade between them. Modern developments include the opening of free trade agreements, extensive immigration from Mexico and Latin America, and drug trafficking concerns in these regions.

Neo-Keynesian economics

Neo-Keynesian economics is a school of macroeconomic thought that was developed in the post-war period from the writings of John Maynard Keynes. A group of economists (notably John Hicks, Franco Modigliani and Paul Samuelson), attempted to interpret and formalize Keynes' writings and to synthesize it with the neo-classical models of economics. Their work has become known as the neo-classical synthesis and created the models that formed the core ideas of neo-Keynesian economics. These ideas dominated mainstream economics in the post-war period and formed the mainstream of macroeconomic thought in the 1950s, 1960s and 1970s.A series of developments occurred that shook neo-Keynesian theory in the 1970s as the advent of stagflation and the work of monetarists like Milton Friedman cast doubt on neo-Keynesian theories. The result would be a series of new ideas to bring tools to Keynesian analysis that would be capable of explaining the economic events of the 1970s. The next great wave of Keynesian thinking began with the attempt to give Keynesian macroeconomic reasoning a microeconomic basis. The new Keynesians helped create a "new neoclassical synthesis" that currently forms the mainstream of macroeconomic theory.Following the emergence of the new Keynesian school, neo-Keynesians have sometimes been referred to as Old-Keynesians.

New classical macroeconomics

New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics, especially rational expectations.

New classical macroeconomics strives to provide neoclassical microeconomic foundations for macroeconomic analysis. This is in contrast with its rival new Keynesian school that uses microfoundations such as price stickiness and imperfect competition to generate macroeconomic models similar to earlier, Keynesian ones.

Periods of stagflation in Pakistan

The Periods of Stagflation (or also attribute as Stagflation in Pakistan, Pakistan Stagflation or Inflation and unemployment in Pakistan), is a generic on-going period of economic, political and social stagflation in the economic context, which had been affecting the national economic growth of Pakistan in its successive decades of its history.The first period of stagflation began in the 1970s after the disastrous succession of East-Pakistan, followed by the conceding the defeat at the hands of arch-rival, India in December 1971. Although, the government of Zulfikar Ali Bhutto made attempt to end this period, it was subsequently ended by the military government of Zia-ul-Haq in the 1980s. The ending of Soviet engagement in Afghanistan and the offing U.S. aid renewed the second period of stagflation in the 1990s. During this time, both Benazir Bhutto and Nawaz Sharif attempted to tackle the stagflation, with Nawaz Sharif first implementing economic liberalization and privatization at once, in the 1990s. The second period was subsequently ended by Shaukat Aziz who implemented much tougher taxation, monetary and financial development policies in the 2000s. Widely appreciating Aziz's reforms, the third period again return after the 2008 elections and the wide spread of militancy in the Western Pakistan, which would later followed the global finance crises. Pakistan's leading economists, specialists, technicians, and financial scholars are uncertain what causes the stagflation in the country in the first place, and many attribute this period to several factors that may have cause the stagflation including the state's role in war on terror, corruption, tough monetary policies and several other factors.

Yousaf Raza Gillani (Office: Prime Minister of Pakistan from 2008–2012), is posthumously held responsible for doing too little to improve the economic situation. The leading financial critics points out that Gillani's government carried out no major economic reforms to harness the economic development and the few proposed reforms a and policy measure programmes were either very modest or collapse due to financial crises or opposition from his party's leadership.

Phillips curve

The Phillips curve is a single-equation economic model, named after William

Phillips, describing an inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy. Stated simply, decreased unemployment, (i.e., increased levels of employment) in an economy will correlate with higher rates of wage rises. Phillips did not himself state there was any relationship between employment and inflation; this notion was a trivial deduction from his statistical findings. Samuelson and Solow made the connection explicit and subsequently Milton Friedman

and Edmund Phelps

put the theoretical structure in place. In so doing, Friedman was to successfully predict the imminent collapse of Phillips' a-theoretic correlation.

While there is a short run tradeoff between unemployment and inflation, it has not been observed in the long run. In 1967 and 1968, Milton Friedman and Edmund Phelps asserted that the Phillips curve was only applicable in the short-run and that in the long-run, inflationary policies would not decrease unemployment.

Friedman then correctly predicted that in the 1973–75 recession, both inflation and unemployment would increase. The long-run Phillips curve is now seen as a vertical line at the natural rate of unemployment, where the rate of inflation has no effect on unemployment. In the 2010s the slope of the Phillips curve appears to have declined and there has been controversy over the usefulness of the Phillips curve in predicting inflation. Nonetheless, the Phillips curve remains the primary framework for understanding and forecasting inflation used in central banks.


Reaganomics (; a portmanteau of [Ronald] Reagan and economics attributed to Paul Harvey) refers to the economic policies promoted by U.S. President Ronald Reagan during the 1980s. These policies are commonly associated with supply-side economics, referred to as trickle-down economics or voodoo economics by political opponents, and free-market economics by political advocates.

The four pillars of Reagan's economic policy were to reduce the growth of government spending, reduce the federal income tax and capital gains tax, reduce government regulation, and tighten the money supply in order to reduce inflation.The results of Reaganomics are still debated. Supporters point to the end of stagflation, stronger GDP growth, and an entrepreneur revolution in the decades that followed. Critics point to the widening income gap, what they described as an atmosphere of greed, and the national debt tripling in eight years which ultimately reversed the post-World War II trend of a shrinking national debt as percentage of GDP.

Regulation school

The regulation school (French: l'école de la régulation) is a group of writers in political economy and economics whose origins can be traced to France in the early 1970s, where economic instability and stagflation were rampant in the French economy. The term régulation was coined by Frenchman Destanne de Bernis, who aimed to use the approach as a systems theory to bring Marxian economic analysis up to date. These writers are influenced by structural Marxism, the Annales School, institutionalism, Karl Polanyi's substantivist approach, and theory of Charles Bettelheim, among others, and sought to present the emergence of new economic (and hence social) forms in terms of tensions within existing arrangements. Since they are interested in how historically specific systems of capital accumulation are "regularized" or stabilized, their approach is called the "regulation approach" or "regulation theory". Although this approach originated in Michel Aglietta's monograph A Theory of Capitalist Regulation: The US Experience (Verso, 1976) and was popularized by other Parisians such as Robert Boyer, its membership goes well beyond the so-called Parisian School, extending to the Grenoble School, the German School, the Amsterdam School, British radical geographers, the US Social Structure of Accumulation School, and the neo-Gramscian school, among others.

Spanish miracle

The Spanish miracle (Spanish: El Milagro español, literally "The Spanish Miracle") was the name given to a broadly based economic boom in Spain from 1959 to 1974. It was brought to an end by the international oil and stagflation crises of the 1970s.

Supply shock

A supply shock is an event that suddenly increases or decreases the supply of a commodity or service, or of commodities and services in general. This sudden change affects the equilibrium price of the good or service or the economy's general price level.

In the short run, an economy-wide negative supply shock will shift the aggregate supply curve leftward, decreasing the output and increasing the price level. For example, the imposition of an embargo on trade in oil would cause an adverse supply shock, since oil is a key factor of production for a wide variety of goods. A supply shock can cause stagflation due to a combination of rising prices and falling output.

In the short run, an economy-wide positive supply shock will shift the aggregate supply curve rightward, increasing output and decreasing the price level. A positive supply shock could be an advance in technology (a technology shock) which makes production more efficient, thus increasing output.

Triangle model

In macroeconomics, the triangle model employed by new Keynesian economics is a model of inflation derived from the Phillips Curve and given its name by Robert J. Gordon. The model views inflation as having three root causes: built-in inflation, demand-pull inflation, and cost-push inflation. Unlike the earliest theories of the Phillips Curve, the triangle model attempts to account for the phenomenon of stagflation.

Yousaf Raza Gillani

Syed Yousaf Raza Gillani, also spelled Gilani (Urdu: یوسف رضا گیلانی; pronounced [ˈjuːsʊf ˈrəzɑː ɡɪˈlɑːniː] born 9 July 1952), is a Pakistani politician who served as 18th Prime Minister of Pakistan from 25 March 2008 until his retroactive disqualification and ouster by the Supreme Court of Pakistan on 26 April 2012. He currently serves as the vice-chairman of the central executive committee of the Pakistan Peoples Party.After 1988 general elections, he secured his ministerial appointment in the Ministry of Tourism in the government of former prime minister Benazir Bhutto, and since then, he had been a senior member of parliament for the Multan District. After his party securing the plurality in the 1993 general elections, Gillani was elevated 15th Speaker of the National Assembly by the-Prime minister Benazir Bhutto, a post he held until 16 February 1997. On 11 February 2001, Gillani was imprisoned in Adiala Jail by a military court instituted under President Pervez Musharraf on accusations and charges of corruption, and released on 7 October 2006.In the wake of 2008 general elections, his party formed a four-party coalition alliance and nominated him for the office of Prime minister. He is the first prime minister that holds the distinction (thus far, the only prime minister to have achieve this milestone) for successfully presenting five consecutive federal budgets. As Prime minister, Gillani announced the formation of the Truth and Reconciliation Commission, rehabilitation of the troubled and war-torn tribal belt, and promised to reduce the federal budget deficit as well as announcing his ambitions to improve the system of education. This was followed by announcing the new agriculture, land and economic policy that lifted the bans on labour and students' unions, while worked and implemented the new energy and nuclear policies to tackle the energy crisis in the country. But his policies, without meaningful economic reforms, led to a high rise in inflation and sharp decline in economic performance, a period referred to as "Era of Stagflation".A consistently strong US ally as prime minister, Gillani was ranked as 38th most powerful person in the world by Forbes. After years of confronting and resisting the Supreme Court of Pakistan rulings to reinstate the corruption cases against Benazir and Asif Zardari, he was convicted by the supreme court of violating the article 63(1)(g) of the constitution of Pakistan, on 26 April 2012. The verdict was rendered by the Supreme Court when it found him the guilty of contempt of court for refusing to reopen corruption cases against president Asif Ali Zardari, but it gave him only a symbolic sentence "till the rising of the court", a sentence lasting 30 seconds. Finally, on 19 June 2012, he was disqualified and ousted by the Supreme Court from holding the prime minister office, with the Chief Justice Iftikhar Chaudhry clarifying that: "Gillani had ceased to be [the] prime minister and (is) disqualified from membership of parliament on 26 April 2012, the date of his conviction".

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