new and old paradigm economics
new and old paradigm economicsthe ‘buzzwords’ now used to describe how the economy ‘works‘with regard to ECONOMIC GROWTH, UNEMPLOYMENT and INFLATION.
The ‘old’ paradigm, drawing heavily on the PHILLIPS CURVE and charting the experiences of many advanced industrial countries in the 1960s, 1970s and 1980s, postulates that attempts to promote faster economic growth and reduced unemployment inevitably results in higher inflation. (See Fig. 190 (a), UNEMPLOYMENT ). By contrast, the ‘new’ paradigm is based on the experiences of the USA (and the UK) in the 1990s when economic growth brought with it lower unemployment and lower inflation. Proponents of the ‘new’ paradigm postulate that globalization and advances in information technology have brought about permanent and fundamental changes to the USA economy and its sustainable growth rate. The combination of globalization (increased international competition) and the rise of‘knowledge-based’ industries (telecommunications, electronics and computing and trading through the INTERNET) has increased PRODUCTIVITY and brought with it lower prices. In sum, the economy can grow at a faster sustainable rate without stoking up inflation.
Is this a temporary ‘blip’ or a major shift in the way modern economies work? If the latter, why hasn‘t it happened in Europe, especially Germany, France and Italy, where although inflation is low, economic growth is stagnating and unemployment remains high? Proponents of the ‘new’ paradigm answer this by suggesting that the ‘gateway’ to achieving the virtuous circle of growth and low unemployment and inflation in addition to globalization and information technology is more flexible labour markets and the removal of other supply-side deficiencies. The USA and the UK have rapidly moved in this direction whereas Germany and the others have not. See NEW ECONOMY/NEW ECONOMY COMPANY, SUPPLY-SIDE ECONOMICS.