Brief History of Macroeconomic Thought and Policy

The 1970s: Troubles from the Supply Side

For many observers, the use of Keynesian fiscal and monetary policies in the 1960s had been a triumph. That triumph turned into a series of macroeconomic disasters in the 1970s as inflation and unemployment spiraled to ever-higher levels. The fiscal and monetary medicine that had seemed to work so well in the 1960s seemed capable of producing only instability in the 1970s. The experience of the period shook the faith of many economists in Keynesian remedies and made them receptive to alternative approaches.

This section describes the major macroeconomic events of the 1970s. It then examines the emergence of two schools of economic thought as major challengers to the Keynesian orthodoxy that had seemed so dominant a decade earlier.