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When demand turns slack and unemployment shoots up, Keynesianism can still play an important role. But now the economic pendulum has swung from underutilization of capacity to overstraining of productive resources, and policies aimed at further firing consumer demand without simultaneously increasing investment and supply have become about as useful as Gerald Ford WIN buttons. Says Feldstein: "It is a much more complex world than Keynes or anyone else admits, and it is constantly changing. We know enough to move the economy out of a trough but not to control the business cycle."
Observes Bruce MacLaury, president of the Brookings Institution, which is no longer quite the hotbed of Keynesianism that it once was: "It has been hard for the Keynesians to contend that their prescriptions are the way out of stagflation. Ultimately, they are forced to admit that Keynesian techniques just bring forth inflation and not real growth. They answer that the solution is wage-price guidelines or another form of an incomes policy, but that is a very weak reed to lean on."
Not only in the U.S., but in countries as disparate as Sri Lanka, Canada and Algeria, there is an attraction to the new, incentive economics. Among developing nations, those that have prospered most have had the freest, most market-oriented economies: Singapore, Taiwan and South Korea, among others. In industrial Europe, incentive economics is making particularly rapid progress:
> In France, Premier Raymond Barre is scrapping much of the policy, which dates back to Louis XIV, that the government should determine the amount of investment and fix prices. Controls on goods from bread to books, from steel to cars, have been freed. State-owned companies, which control more than 25% of France's economy, have been instructed to operate as if they were private enterprises by relying less on subsidies and making a determined effort to turn a profit.
> In Britain, Margaret Thatcher's Tory government was swept into Office in May on a tide of popular fury at the dismal results of Labor rule and is now rapidly unwinding much of the high-tax, nationalized welfare state. Income tax rates have been reduced from a top of 83%, to 60%; a third of Britain's nationalized North Sea oil industry has been put up for private sale; and the government now has plans to sell off its shares of other state industries, including British Airways.
> In West Germany, Chancellor Helmut Schmidt's Social Democratic government, supported by powerful but reasonable trade unions, has largely held a noninterventionist course and ignored demands that the government cut taxes or raise spending every time a troubling economic forecast is issued. Result: West Germany's inflation rate is one-third as steep as the U.S.'s, its unemployment rate is only slightly over half as high, and the country's living standards are rising.