Academic journal article History of Economics Review

Macroeconomics and the Phillips Curve Myth

Academic journal article History of Economics Review

Macroeconomics and the Phillips Curve Myth

Article excerpt

Macroeconomics and the Phillips Curve Myth, by James Forder, Oxford, Oxford University Press. 2014, ix +306 pp. $90 (hbk), [pounds sterling]55, ISBN: 978-0-19-968365-9

Here is a story told hundreds of times--in this case by a retiring Australian central bank governor, in a radio lecture for the general public, on the history of monetary policy:

In 1958 Professor A.W.H. Phillips... published a paper with the
uninspiring title of 'The relation between unemployment and the rate of
change of money wage rates in the United Kingdom, 1861-1957'. This
showed that there had been an inverse relationship between the rate of
wage inflation and the rate of unemployment over that period; that is,
when wage inflation was low, unemployment was high and vice versa. This
relationship became known as the Phillips Curve, and it lent empirical
support to the view that there was a choice between a low unemployment-
-high inflation situation, or a high unemployment--low inflation
situation, and the various combinations between these two extremes. Not
surprisingly, given this choice, the vast majority would choose a point
that had low unemployment even though it meant higher inflation.
Unfortunately, there was a very serious dynamic problem with the
Phillips Curve, of which its creator was well aware... [T]o get
unemployment below the level that was originally consistent with low
inflation will take a series of increases in inflation with no apparent
equilibrium end-point in sight. Thus, you cannot go to a permanently
lower unemployment rate by accepting inflation at a constant higher
level; what is required is a constantly increasing rate of inflation...
This critique of the overly ambitious use of Keynesian demand
management policy was mainly the work of Milton Friedman. For a decade
or more it was hotly debated, but was ultimately proved right and is
accepted today by economists of virtually all political persuasions.
(Macfarlane 2006, 21-22, 24)

It is a story everybody knows. According to James Forder, it is a myth. Each part of it is wrong: that Phillips convinced the profession of a stable inverse relationship between wage inflation and unemployment; that economists saw it as a menu of options; and that policymakers chose inflationist policy from the menu. Few will be ready to accept such strong claims, and Forder knows that. He is saying that the textbooks are misleading; that someone like Macfarlane--no dummy, who ran a central bank for years--can have a fundamental misconception about fairly recent history in his area of expertise; essentially, that the profession has developed a false memory. He better be bringing strong evidence.

He does. He softens the reader by pointing out that to believe the conventional wisdom is to believe something implausible: it implies that the economics profession of the 1960s was stupid: 'struggling to articulate the simplest ideas, and disputing the obvious even when it was stated'. The myth suggests 'an interlude in which either economics was bizarrely primitive or its practitioners were extraordinarily slow-witted' (pp. 1-2). But, ultimately, Forder's book convinces by sheer brute force of literature review. He acknowledges he has not read everything, and perhaps there is a hidden seam of Phillips curve inflationism somewhere to vindicate the textbook story. But he has clearly read a lot--he discusses more than a thousand papers and books--and he demonstrates in detail that the myth's standard supports do not say what we thought they say, and that in any case these papers are not representative of the literature of the 1950s and 1960s.

First, Forder tackles 'the curve of Phillips' itself, Phillips' 1958 Economica paper. Phillips' results were not novel in suggesting a negative relationship between wage or price change and unemployment--the idea goes back at least as far as Hume, and statistical estimations to Fisher and Tinbergen in the 1920s and 1930s. …

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