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Ten years ago—at least in the U.S., Canada, Western Europe and Japan —this modern capitalism seemed to be on the verge of producing the permanently affluent society. Keynesian policies had kept recessions brief, mild and infrequent; the end of World War II opened the longest period of sustained growth ever. American Economist George Stigler announced that "economics is finally at the threshold of its Golden Age—nay, we already have one foot through the door."
Today few would express such euphoria, but many economists, politicians and philosophers propose various solutions to the troubles in the system.
Inflation and Recession
Through the 1960s, these were considered antithetical problems: inflation was a phenomenon that accompanied booms, and recession was so much its opposite that it was often called "deflation." Today, inflation and recession have become overlapping phases of a cycle—to which economists have given such cacophonous names as "stagflation," "slumpflation," "infession" and "inflump." Breaking that inflation-recession cycle is rapidly becoming the major problem, not only of capitalism, but of democracy. Inflationary recession is more likely than anything else to make voters turn to an authoritarian fascist or socialist system that would fix price, production and employment levels by fiat, and permit no argument.
Unhappily, the systems of Adam Smith, and even of Keynes, give little guidance as to how to cope with the malaise. Much of the explosive 1973-74 inflation, of course, resulted from what economists call "random shocks" to the system: oil price gouging by the OPEC cartel and food shortages caused largely by unusual weather. But the underlying inflationary momentum seems to be supplied by modern capitalist democracy.
The root problem is that everybody wants more. Even in prosperous times, the demands of labor for ever higher wages, of generals and admirals for increasingly sophisticated weapons, and the less affluent for expanded government social services always add up to more than the economy can produce at stable prices. Rather than say no to the demands of any vocal constituency, democratic governments too often find it easier to run huge budget deficits, thus fueling inflation.
Sooner or later, however, governments must act to curb inflation—and risk recession—by curtailing spending and restricting the growth of money supply. Many economists indeed blame all post-World War II recessions on overly zealous anti-inflationary policy. But that criticism obscures a vital point. In a society that operates by private decision-making rather than central command, governments must make difficult judgments on the exact mix of tax, spending and money-supply policies needed to nudge businessmen and consumers into the "right" decisions on how much to buy, build and borrow. Inevitably, the fallible humans who run treasury ministries and central banks will make some wrong judgments—and the economy will react.
Another reason why recession is always a threat in a capitalist economy