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CHAPTER II

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the econoay by public spending, whlch has not at the beglnnlng of a period a correspondlng aiount of output, aaounts to an order, given to the producers, to produce the addltlonal output whlch corresponds to the addltlonal aoney; therefore, at the end of the period, increased aoney supply and increased output will aatch, wlthout produclng lnflationary result. Any other intervention alaed at increasing prlvate deaand, llke for eaaaple a lowering of the ratę of interest through an appropriate Increase of aoney supply and a consequent increase in the deaand for lnvestaents, would perfora a slallar role.

That thls aodelllng constitutes an eaasculated laage of the auch rlcher envlronaent descrlbed ln the prevlous sectlon could hardly be denled. However, the features and the posslble roje* of aacroeconoalc lntervent ions •* are captured qulte effectively.

European governaents behaved 'as lf' such a aodel actually captured the fundaaental perforaance of the econoalc systea, and thls helped to aalntaln* the econoales . along a fundaaentally expansive trend and to pursue fuli eaployaent.

The 'black cloud' of aoney wagę inflatlon gradually began to overlap not only on the facts but on the aodelllng of thea. The exlstence of an lnverse relatlonship between the level of uneaployaent and a positlve ratę of wages and price Inflatlon was first observed, and, later on, over- laposed upon the above descrlbed aodel (the so called Phillips curve). It ls not by chance that foraany years the Phillips curve was Interpreted, by a causal point of view, elther as a aanifestat1 on of a confllct of power between eaployers and wagę earners (and thelr unlons), whlch were consldered as being reinforced by fuli eaployaent, or as the aanlfestation of the effects of pure aarket forces; ln thls latter case, wagę Inflatlon was consldered as the result of a noraal deaand puli ln a situatlon of labour shortage produced by the proxlalty to fuli eaployaent.

What it ls worthwhile to be stressed here - sińce thls has tended to be forgotten later on - ls that ln both cases wagę Inflatlon was strlctly linked to the fact that fuli eaployaent was a celllng tc deaand expanslon. In other words, the Phillips relatlonship, at least at the beglnnlng, in no way altered the 'flx-prlce' naturę of the basie aodel; It was only a sort of 'trap¹, whlch could be ellclted by the fact of having reached the proxlalty of fuli eaployaent.

On the factual ground, the eaerglng of lnflationary pressures acted as a constraint upon expansive pollcles and produced ąn increasingly frequent interruptlon of thea. Me argue that lt ls extreaely llkely that such repeated interruptlons heavlly contributed to change the expectatlons of coapanles, slowlng down the ratę at whlch productlve capaclty was being bullt up. We conslder lt as eąually probable that such a lowering of % the ratę of Increase of productlve capaclty heavily contributed to aake the aggregate supply Increasingly rigld towards expanslon, aggravating