Front Page Titles (by Subject) Inflation and Unemployment - Literature of Liberty, July/September 1979, vol. 2, No. 3
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Inflation and Unemployment - Leonard P. Liggio, Literature of Liberty, July/September 1979, vol. 2, No. 3 
Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.
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Inflation and Unemployment
“Old and New Fashions in Employment and Inflation Theory.” Journal of Economic Issues 13 (March 1979): 1–18.
Keynesian economics has proved unable to deal with the increasing rates of inflation prevalent in the U.S. economy. An approach emphasizing microeconomics is needed if the problem of stagflation is to be controlled.
A common occurrence in the history of science is that a widely accepted theory proves unable to cope with new facts. Instead of revising the theory, proponents of the dominant paradigm often deny that essential changes are needed, refusing to confront the challenge which the new data provide. Keynesian economics fits this pattern. Designed to handle the issues of the 1930s depression, it stressed aggregate spending and largely ignored problems of inflation. When inflation was discussed, Keynesian economists dealt with it only in terms of too much spending rather than with particular prices that were too high.
A major problem Keynesian theory is unable to explain concerns the simultaneous existence of inflation and unemployment, popularly termed stagflation. This is not in its origins a recent development and was in fact present in the 1930s and 1940s. Keynesianism finds this difficult to understand, since according to its view, increased spending should generate employment.
One modified Keynesian discussion of these problems has appeared in a recent book by Edmond Malinvaud. He attempts a mathematical derivation of the Keynesian theorems, but his works in large part
reduce to tautologies that ignore the important policy issues. Sidney Weintraub, the author of another recent discussion, is at least aware of the central issues of today. He points out correctly that Keynesian theory assumes that the consumers can anticipate all the effects of inflation, surely a dubious proposition. Weintraub's analysis emphasizes wage rates as a cause of inflation, but like Keynesian theory, it overemphasizes macroeconomics.
A better way to combat inflation is to cut out the waste in government programs. Since most unemployed workers are unskilled, we should emphasize programs to provide specifically for this type of worker. Price and wage controls should be applied to industries that are the source of the trouble, not to the entire economy indiscriminately.