A Game-Theoretical Interpretation of Inflation and Unemployment in Western Europe
Political scientists and economists with a comparative bent have for some time been fascinated by the opportunities for theory testing and theory building provided by the largescale "natural experiment" of the worldwide economic crisis that began in the early 1970s. Compared to the preceding decade, the middle and late 1970s and the early 1980s were indeed a difficult period for all industrialized Western (OECD) countries. Economic growth and employment growth were reduced by half, while rates of unemployment and inflation levels were on the average twice as high. 1
But even as the average economic and employment performance of OECD countries declined after 1973, the relative distance between more and less successful countries increased considerably for most indicators of economic performance. Equally interesting is the fact that cross-national differences do not seem to correspond to conventional economic hypotheses ( Therborn 1986). Even the almost tautological link between economic growth and employment is weak (r2 = .32); there is no statistical association between employment growth and levels of unemployment (which are affected not only by the course of the economy but also by changes of the supply of labor); and the relationships between economic and employment growth on the one hand and inflation on the other hand are also extremely weak.
Similarly, a glance at a scatterplot of the two indicators with the greatest political salience, inflation and unemployment, does not confirm expectations (associated with the once-popular Phillips curve) of a strongly negative correlation. The correlation is weakly positive, instead, and there have been countries with low and others with high rates of inflation at every level of unemployment (Figure A1.1). Confronted with the worldwide crisis, OECD countries apparently have achieved widely differing profiles of economic performance -- some reaching a compromise among several goals, some doing poorly in most respects, and some doing well in one dimension and poorly in another.
Political scientists have been attracted by this body of economically unexplained variance. Cross-national quantitative studies, focusing on the party-political orientation of
First published in Journal of Public Policy 7 ( 1987):227-257.