In May 1940, the English novelist George Orwell reviewed the autobiography of Havelock Ellis.

Ellis was a famous physician and social reformer. He was born in 1859 and died in 1939, just months before World War II erupted.

Orwell began his review like this:

"As the surviving writers of the nineteenth century drop away, one has the feeling that they are dying just in time.

"Ten years more, even five years, and they might recoil in horror from the world they have helped to create.

"When Havelock Ellis was born, the Origin of Species was a brand-new scandal; when he died, the Germans were in Prague.

"In between there lay eighty years of 'progress' and 'enlightenment,' of patient, courageous effort by men like Ellis himself to chip away at the bases of Christian civilisation.

"It had to be done, but the result was totally different from what had been intended."

It's one of the all-time intros.

And it feels like there could be an analogy in there, somewhere, about the state of our modern economic policies and the policymakers who got us here.

Let me explain.

Did we throw the baby out with the bathwater?

In the 1970s, Australia's economy was suffering a major crisis.

It was hit by "stagflation" — stagnant demand and persistently high inflation, with high and rising unemployment — and Australia's policymakers couldn't work out how to fix it.

But they had to try.

So in their desperation, they dumped the "full employment" policy of the post-war years that had kept the unemployment rate below 2 per cent for over 25 years, and which helped Australia's middle class to expand rapidly after World War II.

They replaced it with a different policy.

The new model, built in the 1980s and early 1990s, deliberately allowed a much higher level of unemployment.

That higher level of unemployment was used as a policy tool to suppress wages and inflation.

It's the model we're still living with.

But when policymakers turned their backs on the old full employment model, they threw the baby out with the bathwater.

The positive spillovers from having a fully employed economy? Gone. The cultural and economic benefits of having a public good like the Commonwealth Employment Service? Gone.

Something else happened, too.

Policymakers lost faith in the capacity for fiscal policy (the government's taxing and spending powers) to manage the business cycle.

They gave that job to monetary policy (ie the central bank's use of interest rates to influence economic activity).

The shift to the new model ushered in a new era.

And after the initial horror of the early 1990s recession, the economy eventually grew for 29 uninterrupted years, a record achievement.

But it had a cost.

The phenomenon of long-term unemployment became a genuine scourge after we abandoned full employment. Casualisation and precarious work have spread through the economy.

Wealth inequality has increased noticeably. Successive governments have refused to lift thousands of households out of poverty.

And in recent years, wages growth has whittled down to nothing, while the share of national income going to workers has touched record lows.

Is that what the old policymakers would have wanted for Australia? 

Would they be proud? Ashamed? Ambivalent?

What is 'fiscal policy'?

At any rate, the loss of faith in fiscal policy to manage the business cycle was momentous.

In the old full employment days, Labor and Coalition governments relied heavily on fiscal policy as a major policy lever.

They'd often spend more money into the community than they'd collect in revenue (which meant their budgets recorded "deficits") to stimulate as much employment as possible.

And they were conscious that inflation could become a problem in a fully employed economy, so they were willing to lift taxes to dampen it.

Why would you lift taxes to push inflation down?

Because higher taxes can reduce demand for certain goods and services, and if you get economic activity to slow down enough you can relieve pressure from an economy that's running at full capacity.

Does that idea sound familiar?

It's something proponents of Modern Monetary Theory (MMT) talk about now.

But it wasn't a theory for Australia's prime ministers in the post-war years.

It became standard practice.

Menzies was the first to use a Keynesian approach to fight inflation

It's why the "father" of the Liberal Party, Robert Menzies, would hardly recognise his party's economic policies today.

Menzies was prime minister on two separate occasions. His record second stint lasted from 1949 to 1966.

He wasn't ashamed of budget deficits. And he was happy to lift taxes to control inflation.

For example, in 1951, Australia was experiencing a huge spike in inflation.

According to the Bureau of Statistics, consumer price inflation peaked at 23.9 per cent that year —  it remains the record in the 70-plus years of the CPI data series.

See the graph below.

There were a few sources for that inflation.

The most significant was the 'Korean War Boom,' which imported a lot of inflation to Australia, and the expansionary post-war economic activity that was occurring domestically also contributed.

How did Menzies handle it?

He told parliament he didn't want to cut spending, so he'd lift taxes instead.

And he planned to collect enough tax to produce a budget surplus (so he'd be taking more money out of the economy than he'd be spending into it) in a deliberate effort to suck inflation out of the system.

It was the first time a federal government had deliberately used Keynesian anti-inflationary fiscal policy in their budget.

He increased company tax, income tax, excise duty and sales tax, and he removed special depreciation allowances.

"A deficit budget in an inflationary period like this would be a scandal," he told parliament.

"It would expose any government to the accusation that it did not care about inflation because it was prepared to pour 50,000,000 pounds of new money into the existing supplies and so aggravate the inflation.

"Should taxation be increased? [And] if it should, are the increases fairly distributed? I will undertake to demonstrate that the answer to both these questions ought to be, 'Yes.'"

That was the "father" of the Liberal Party speaking, in case you've suddenly become confused.

Did the policy work?

Funnily enough, the 1951-52 budget is remembered as the "horror budget" because the business community and press were aghast at the tax increases.

And its timing was a little unfortunate.

By the time it was introduced to parliament, wool prices had already fallen a long way from their peaks at the start of 1951, and capital inflow from overseas had fallen off.

By August 1952, many of the fiscal measures in the horror budget had already been reversed. The 1952-53 budget included cuts to company and sales tax.

But by 1953-54 the inflation problem had been checked, and inflation remained relatively low for the next 20 years.

"With the exception of a six-month period in 1956, year-ended inflation remained below 5 per cent from 1953 to 1972, reaching an historic low of -1.3 per cent in June 1962," the ABS says.

Over time, treasurer Arthur Fadden came to think of his 1951 budget as one of the best he delivered in his nine years in the job.

And the 1950s and 1960s are often called the "golden age" for Australia's economy, where its full employment model supported higher wages and rising living standards for millions.

Fadden died in 1973, and Menzies died in 1978.

Neither of them would see how policymakers would soon turn their backs on full employment for good, to embrace neoliberalism, as they tried anything to fix the major economic problem of the 1970s.