All 'right-thinking' economists believe in the concept of the Non- Accelerating Inflationary Rate of Unemployment (NAIRU). This abstract construct carries great weight in policy-making circles, and is central to the arguments that full employment cannot be restored. Unemployment is determined by a range of factors, mainly on the supply side. At this level, inflation is stable, and attempts to move away from this level simply lead to inflation.
Curiously, attempts to measure the level of the NAIRU give the result that it is always close to whatever the actual level of unemployment happens to be. This in itself should be sufficient to show the emptiness of the concept.
There are numerous examples of economies moving rapidly to quite different inflation paths due to the impact of political, social and economic factors quite separate from movements in unemployment. The British economy since the war has had two major external shocks from commodity prices. In the early Fifties, the prevailing social values enabled the shock to be absorbed without any permanent increase in either inflation or unemployment. In the mid-Seventies, this was no longer the case.
In Germany in the mid-Seventies, the collective response to the increase in the price of oil was such as to place the economy on a far lower inflationary path than prevailed elsewhere in Europe. Now, as social cohesiveness in Germany disintegrates, the economy is being shocked on to a higher inflation path, despite the existence of high unemployment.
The challenge for the Nineties is to construct social and economic policies that promote social cohesion and responsibility to the community as a whole. There is such a thing as society, and recognition of the self-organising nature of society and the economy is vital to the intellectual challenge of restoring full employment. Positive feedback allows behaviour to alter and unemployment to fall without accompanying increases in inflation.
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