EVOLUTION OF GLOBAL FINANCE
15
spending, and intervention in interest rate levels and the money supply
to try to manage their economies.
By the 1960s, confidence in governments' ability to keep economies
stable was at its height; many people believed that it was possible to
``fine tune'' the economy to control variations in production output
and employment levels.
In the 1970s, following the oil crisis of 1973 when the OPEC oil-
producing nations dramatically increased prices, the developed nations
experienced wild fluctuations in inflation, unemployment, and produc-
tion output. The new phenomenon of ``stagflation'' appeared, where
a rapid price inflation combined with high unemployment prior to
the 1970s, inflation had only occurred during periods of prosperity and
low or declining unemployment.
By the 1980s, it was clear that ``Keynesian'' economics as generally
understood was not working effectively. Criticisms ranged from the
simple argument that government bureaucracies were not efficient
enough to act quickly to more complex theoretical views that cast
doubt over whether monetary and fiscal policies could actually affect
the overall economy at all.
Monetarism (see Chapter 8) generally favors a slow, steady increase
to the money supply in line with growth in output and is against
governments actively trying to influence the economy by expanding the
money supply during bad times and slowing the growth in the money
supply during good times. In the 1970s, the debate between monetarist
and Keynesian approaches was a huge controversy as governments
struggled to cope with inflation and unemployment.
Two other macroeconomic approaches developed out of the chaos
of the 1970s, ``new classical'' economics and ``supply-side'' economics.
New classical economics suggests that people and businesses have
rational expectations about the economy and that government inter-
vention can have little effect on overall output it advocates very
little government intervention. Supply-side economics focuses on the
idea that heavy regulation and high taxation reduces incentives to be
productive (work, save, and invest). Deregulate and reduce tax, they
say, and the economy will expand. During Ronald Reagan's presidency
in the 1980s, the US experimented with supply-side ideas. Did they
work? The jury is still out, with supply-siders pointing to the facts that
