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THE EARLY 1970s marked a watershed in the macroeconomic performance of the advanced industrial economies. In the 1950s and 1960s almost all the economies of the OECD enjoyed a period of low unemployment, rapid growth of GNP and living standards, and low if gently rising inflation. 1 By the end of the 1960s a leading macroeconomist could plausibly speak of the" obsolescence of the business cycle pattern." 2 Yet shortly into the 1970s, severe and seemingly intractable macroeconomic problems emerged. The Bretton Woods international monetary system collapsed in 1971. An inflationary boom in 1972-73 gave way to deep worldwide recession in 1974-75. In the subsequent period, the OECD economies have sustained rising unemployment, slow economic growth, and continued high inflation, with another deep recession in the early 1980s.

Some measures of the worsening macroeconomic …