Why some nations may never return to full employment
In short: Standard economic theory assumes that a country can always reach full capacity. But what happens when a nation loses its competitive edge so completely that trying to fix it triggers runaway inflation? Professor Douglas McWilliams suggests we need a new framework to understand this permanent shift in global power.
Traditional economic growth models are built on the premise that economic capacity is fully utilized. Under this view, if an economy underperforms, policy levers can be pulled to return it to its natural state of full employment. However, McWilliams argues that this assumes a stable landscape of 'relative advantage.' When a region suffers a massive loss in competitiveness—due to structural shifts or global competition—it may find itself in a permanent state of economic displacement.
The core problem lies in the trade-off between recovery and stability. If a part of the world loses its ability to compete on price or innovation, attempting to force it back to full employment through traditional means could create 'unacceptable inflation.' This suggests that some regions may be structurally locked out of their previous economic status, unable to price themselves back into prosperity without destabilizing the broader economy.
McWilliams places this inside a broader trend: how two-thirds of humanity moved from famine towards decent wealth. This massive demographic and economic transition alters global dynamics in ways that traditional theories may fail to capture. By acknowledging these permanent losses of competitiveness, we can better understand the 'balance of payments constraints' that have historically shaped growth and continue to define our modern era.
This talk honours Sir Donald MacDougall, an individual who shaped UK fiscal strategy throughout World War II and held the role of Chief Economic Adviser during the late 1960s and early 1970s. MacDougall’s work on shipping losses and 'The World Dollar Problem' highlights the long-standing importance of global trade constraints—a theme McWilliams uses to ground his new theory of growth.
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Sources
- Summary by Intellect · source: A New Theory of Economic Growth - Professor Douglas McWilliams
- Also: A New Theory of Economic Growth
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