Academic journal article Agenda: A Journal of Policy Analysis and Reform

Macroeconomics and the Phillips Curve Myth by James Forder

Academic journal article Agenda: A Journal of Policy Analysis and Reform

Macroeconomics and the Phillips Curve Myth by James Forder

Article excerpt

Macroeconomics and the Phillips Curve Myth by James Forder

(Oxford: Oxford University Press, 2014)

In 1958 A.W.H. (Bill) Phillips, professor of economics at the London School of Economics, published a highly influential paper in Economica entitled 'The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957' (Phillips 1958). A graph depicting the relation between the level of unemployment and the rate of change of wages (and given some basic assumptions, the rate of change in prices) was soon referred to as the 'Phillips Curve'. What appeared to be remarkable - bearing in mind the structural changes that occurred in the economy, including the labour market, over such a prolonged period - was the stability of the relationship between unemployment and wages/prices.

It appeared to some - Phillips himself was not one of them - that the Phillips Curve provided a menu from which policymakers would be able to choose from various combinations of unemployment and inflation. An article published two years later by Paul Samuelson and Robert Solow seemed to support that idea. Soon it was claimed that policymakers were using the Phillips Curve to implement policies favouring lower rates of unemployment even at the expense of faster rates of inflation. Next were a number of econometric studies which sought to establish whether a Phillips Curve existed in different countries and at different times. Towards the end of the 1960s, Milton Friedman and Edmund Phelps, in separate papers, argued that expectations of increased wages and prices would lead ultimately to the failure of any attempt to trade off higher inflation for lower unemployment; continuous inflation would alter expectations and consequently shift the Phillips curve - perhaps to a vertical position - confounding thereby the possibility of a long-run trade-off. Following Friedman and Phelps, it was claimed that a patch-up job was undertaken on the Phillips Curve, including the incorporation of special factors such as changes in trade union behaviour. This subsequent work, however, seemed to confirm that expansionary macroeconomic policy would have little lasting effect on unemployment.

Forder contends that most of this story - what he calls the 'Phillips Curve story' - is based on a number of myths. For a start, he asserts that Phillips's 'finding of a negative relation between wage change and unemployment was not original, and, in any case, his work impressed few'. Further, Samuelson and Solow 'were not advocating inflation and practically no one thought they were. The idea that they had been highly influential in promoting an inflationist view is a later invention.' As to the econometric work of the 1960s, Forder concludes that it 'was hardly influenced by Phillips at all and certainly was not an attempt to refine his work. With few exceptions, the authors concerned showed no hint of believing their work indicated that inflation would be a sensible policy, and the few who were exceptions mostly had sensible reasons for favouring inflation.' Forder argues, furthermore, that the 'expectations argument was very widely known before Friedman or Phelps stated it. There is virtually nothing in the literature of the period to suggest it was ever doubted.' Finally, he claims that 'to describe the literature of the 1970s as an attempt to "patch up" Phillips's work is quite mistaken'.

How did these myths become so widely accepted? While Forder does not attribute 'the Phillips Curve' story to any individual, Milton Friedman receives a disproportionate amount of his attention. Thus Forder states that 'the best-known early statement of it is found in Friedman (1977) - that author's Nobel Lecture'. What was Friedman's motivation for propagating the story? Forder's answer is that, in the Nobel Lecture, Friedman pursued one of his favourite themes, namely, the scientific nature of economics. The 'Phillips Curve story', Forder contends, is a 'story of how the errors that led to policy failure have been put behind us, and how the dissent for which economists were once so notorious was ended. …

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