Oil Crisis and Rejection of Keynes

Oil crisis was occurred in 1970’s when the US supported Israel against the Arab countries in Yom-Kippur War and as a result the Arab countries imposed an oil embargo on the USA. This led to recession in the US economy as energy prices increased, inflation occurred and also unemployment alert. Suddenly Friedman stepped in and said look this proof that Keynesianism is wrong because according to the Keynesian theory there must unemployment, but no inflation, or full employment, and then you have inflation. Here the idea of demand pull inflation and the cost pull inflation came in. Cost-push inflation was observed in an economy because oil prices have risen due to exogenous reasons and that price boost-up because oil is a very vital sector it affects all the prices so there is inflation. Because of this inflation unemployment rises and all of this is very easily explainable within the Keynesian paradigm.

According to Friedman the huge amount of money behind treatment is the reason of crisis. Actually the capitalists, who had a lot of money, and they were they were restricted by Keynesian policies in many ways. One of the objects of the very rich and powerful capitalists is to have a large class of unemployed people because that gives them labor to work in their factories. If the laborers have good living standards then the labor costs will be high and it will reduce the profits of the wealthy. The capitalists wanted to get rid of these Keynesian policies, and so when the crisis occurred one of the things that Friedman had actually predicted that stagflation could occur he had come up with the explanation of the Phillips curve which was based on expectation in advance of the actual stagnation that replaced, so when the place it was taken as a confirmation of his curies in fact it was not.