Introduction

Capitalism's golden age can be characterized in several ways. Unemployment rates were at historical lows and growth rates of labour productivity and per capita incomes in most economies were at historical highs. In the first instance this was attributed to strong and growing aggregate demand pressures. These buoyant conditions were attributed in turn to the absence of constraints on aggregate demand. During this period there were institutions in most OECD countries that relieved the authorities of any real or perceived need to hold AD below full employment levels. These institutions permitted the simultaneous achievement of other goals, e.g. low inflation, external balance. To a large extent the formation of golden age institutions was causally linked to the performance of the economies in the 1930s and 1940s, demonstrating evolutionary and hysteretic processes with negative feedback.

The main task of this chapter is to explain the poor unemployment performance in the episode since the golden age also as the outcome of evolutionary and hysteretic processes with negative feedback. This includes both the impact of institutions on performance and the impact of performance on institutions, to establish a causal linkage between the golden age and the present episode. We argue that high and rising unemployment in the current episode can be traced ultimately to a marked change in institutions, which was to a very large degree induced by the performance of the economy in the golden age.