John Maynard Keynes famously wrote that “practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist.” Yes: new trends in economic thinking can be wrong. That’s what seems to be happening now. The rapid rise of inflation over the last year has put a serious dent in one new theory: the idea that “running an economy hot”, in particular by being more tolerant of higher inflation, can lead to permanent increases in living standards.
We need to understand some economic history to see why this matters. The conventional wisdom since the Eighties was best put in Chancellor Nigel Lawson’s 1984 Mais Lecture. Before then, macroeconomic policy — essentially interest rates and government borrowing — had been used to try to drive growth, while microeconomic policy — mainly government programmes and regulation (including price and wage controls) — was targeted at controlling inflation and keeping unemployment low.
