Prices and Quantities

During the past decade Arthur M. Okun, like many economists, focused attention on finding ways to fight inflation without sacrificing goals of high employment and prosperity. In recent years the economy has been plagued by stagflation—the simultaneous persistence of high inflation and high unemployment. Traditional methods of aggregate demand management that have been reasonably successful in curing either one or the other of these problems have not been effective, and the nation has not been able to contain inflation even in periods of economic slack. It now seems clear that the economists’ traditional model that presumes short-run flexibility in wages and prices no longer holds for most of the industrial world, and hence the response of inflation to shifts in macroeconomic policy is weak. In this volume Okun seeks to explain that loss of responsiveness by analyzing how modern labor and product markets work and how they are structured. A central feature of Okun’s analysis is implicit contract theory, which recognizes that efficiency-maximizing decisions by business firms reflect long-term considerations as well as short-term changes in markets. His interpretation of microeconomic behavior and macroeconomic performance provides a basis for the design of policies to deal with stagflation.

Arthur M. Okun was a senior fellow in the Brookings Economic Studies program from 1969 until his untimely death in 1980. He was formerly staff economist and then chairman of the President’s Council of Economic Advisers. He was professor and director of graduate studies in economics at Yale University, acting director and director of the Cowles Foundation for Research in Economics, and editor of Yale Economic Essays. He is the author of The Political Economy of Prosperity (Brookings, 1970) and Equality and Efficiency: The Big Tradeoff (Brookings, 1975) and co-editor (with George L. Perry) of Curing Chronic Inflation (Brookings, 1978). In collaboration with George Perry he founded the journal Brookings Papers of Economic Activity in 1970; he and Perry edited it for its first decade.