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Thank you for formulating this so clearly, I have been thinking about an accesible presentation of similar materila but not being able to find such a distinct presentation.

It does give me an opportunity to throw in an historical interpretation of the 70ies stagflation.

As it was presented to me in school the 70ies stagflation (high inflation, high unemployment, low economic growth) killed of the belief not only in the Philips curve but in Keynesian economics in general.

As wikipedia puts it

In the 1970s, many countries experienced high levels of both inflation and unemployment also known as stagflation. Theories based on the Phillips curve suggested that this could not happen, and the curve came under concerted attack from a group of economists headed by Milton Friedman--arguing that the demonstrable failure of the relationship demanded a return to non-interventionist, free market policies. The idea that there was one simple, predictable, and persistent relationship between inflation and unemployment was, at least, questioned.

This is essentially a clash between two theories of empty world economics. From a full-world economics theory we have the US peak oil in 1970 and the increase in oil price.

Now, I am not saying that this has not been observed before. Browsing wikipedia I found for example:

Stagflation - Wikipedia, the free encyclopedia

In the resource scarcity scenario (Zinam 1982), stagflation results when economic growth is inhibited by a restricted supply of raw materials.[14][15] That is, when the actual or relative supply of basic materials (fossil fuels (energy), minerals, agricultural land in production, timber, etc.) decreases and/or cannot be increased fast enough in response to rising or continuing demand. The resource shortage may be a real physical shortage or a relative scarcity due to factors such as taxes or bad monetary policy which have affected the "cost" or availability of raw materials.

Stagflation - Wikipedia, the free encyclopedia

Under this set of theories, the solution to stagflation is to restore the supply of materials. In the case of a physical scarcity, stagflation is mitigated either by finding a replacement for the missing resources or by developing ways to increase economic productivity and energy efficiency so that more output is produced with less input. For example, in the late 1970s and early 1980s, the scarcity of oil was relieved by increases in both energy efficiency and global oil production. This factor, along with adjustments in monetary policies, helped end stagflation.

What changes are the conclusion. Seeing that the stagflation depended on less extraction of a consumable resource, we can conclude that increasing the rate of extraction or replacing it with another resource (for example gas) only creates a bigger bust down the line. The only way of leaving that path is to stop using the consumable resource in favour of a renewable resource (say wind-power) that can be extracted using reusable resources.

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by A swedish kind of death on Sun Aug 16th, 2009 at 01:52:53 PM EST
A key thing to note is that the definitions of inflation are bound up with the empty world "view." I've tried to diary about this a couple of times and never hit "post" because it's exceedingly hard to express because inflation is a circularly defined thing, but some of the oddities about inflation:

  1. Overemphasis on wage inflation.
  2. Failure to account for asset inflation.

definitely derive from an "empty world" set of assumptions.
by Metatone (metatone [a|t] gmail (dot) com) on Wed Aug 19th, 2009 at 05:13:35 AM EST
[ Parent ]
Two years ago I asked How is inflation calculated? and got some very good answers.

The general conclusion I took with me is that inflation is defined differently by different actors.

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by A swedish kind of death on Wed Aug 19th, 2009 at 03:20:22 PM EST
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