What new theory suggests an explanation of the current condition that will enable us to model future events?There are two major historical views to the unemployment - inflation theory. From the 1930's to the 1970's, the Keynesian model was utilized to explain the relationship between full employment and stable prices. In it's most basic form, Keynes' theory states that " the economy may realize either unemployment or inflation, but not both simultaneously."(McConnell and Bure, pg 338)The inverse relationship between unemployment and inflation was further supported by the British economist A.W. Phillips. Phillips theorized that high demand drives higher inflation and the growth of real output and corresponding lower unemployment rates.(McConnell and Bure, pg. 339)The viability of these models was challenged with the events of the 1970's and 1980's. Specifically, we began to see the simultaneous co-existence of both rising unemployment and inflation that was not indicated in either Keynes or Phillips' models.Stagflation was the word used to describe this new phenomenon in which the economy was impacted by high inflation rates and high unemployment. The reality of the current events do not fit this model.The theories and terms used in the past modeled the times but none serve as a guide to describe today's reality.Unemployment has been falling for the past several years, and last month dipped to 4.2 percent, its lowest level in nearly three decades and well below any mainstream estimate of the natural unemployment rate. Economic growth, while slowing somewhat, remains robust. Yet, the predicted inflation is nowhere to be found.(Stevenson, April 11,1999)We are in the longest peacetime expansion in American history. We continue to move into uncharted water(Thurow). The growth rate for 1998 was 3.8 percent, the third consecutive year the economy has expanded at nearly 4 percent. Previous economic theory held that the economy could...
