Prices, wages, unemployment: inflation in contemporary economic theory

The long-standing conviction that it was possible, in a market economy, to steer a middle course between the Scylla of inflation and the Charybdis of unemployment appears to have been shaken by the emergence of "stagflation", the systematic coexistence of inflation and unemployment. Many specialists now see the economy as oscillating between unemployment with price stability on the one hand and full employment with inflation on the other, but with a large number of intermediate situations between these two extremes. One may either decide to "live with inflation" and attempt to mitigate its effects - although this may not be possible in the long run - or resolve to tackle the problem at its roots. The author is sceptical about the lasting effectiveness of direct wage and price controls, and points to the need to influence instead the behaviour that sparks off wage and price increases. Inflation, he argues, results essentially from the expectations of the various economic agents: to fight it requires first and foremost a strong faith in the stability of the economy. This is possible given a climate of social co-operation and mutual trust, in which employers and workers know that if necessary the State is there to see fair play