Forder – The Phillips curve myth

Notes on the Phillips curve

­The Phillips curve myth

 A story that has often been told, including in some textbooks, and has certainly been widely believed, traces the inflation of the late 1960s and 1970s to policy errors arising from a misunderstanding about the Phillips curve. As it is often put, it was Phillips, in Economica, November 1958 who first brought a negative relationship between inflation and unemployment to economists’ attention. Then, perhaps because of the advocacy of Samuelson and Solow, in the American Economic Review, May 1960, this was treated as offering policymakers a ‘tradeoff’ so that they could choose the combination of inflation and unemployment, offered by the curve, that they preferred. Then, supposedly, Milton Friedman, in the American Economic Review March 1968 innovatively raised the issue of expectations. He said that if the policymaker chose a policy of inflation, wage bargainers would come to understand that, and the tradeoff would shift. Then, the story says, there was a great debate, which Friedman eventually won, and attempts to ‘exploit the Phillips curve’ were abandoned.

The trouble with that story is that – so I argue in Macroeconomics and the Phillips curve myth, Oxford: OUP 2014, – none of it is true. There was nothing new about the idea of a negative relation of inflation and unemployment when Phillips wrote; practically no one thought the curve led to a case for inflation, and certainly no one learned that lesson from Samuelson and Solow. But the expectations argument was widely appreciated long before 1968. The whole story, in other words, is fictitious.

Some people say ‘So what?’ Well, one thing is that plenty of textbook authors seem to have thought the story important enough to be taught to students, even though they do not otherwise think the history of economic thought is important at all. So it should not be hard to see that correcting it is just as important. In any case, it is a pity for economists to be telling themselves that their colleagues of the 1950s and 1960s were quite so dim-witted as to not have thought of a relation between inflation and unemployment, or not to realise that if there were consistent inflation, behaviour would adjust to that. Another point is that the belief that these sorts of things were what debate was about makes it very hard to see what the real issues are and, as it turns out, that is a pity as there are still lessons that could be learned from the ideas of that time. But thirdly, like other bogey-men stories, this one frightens the children. It almost seems that policymakers are trained to fear any hint that the control of inflation is not the absolutely top priority, as if any relaxation would be to commit those terrible mistakes of the past all over again. And certain central banks seem very keen to keep repeating the ‘history’ of policymaking, as if those past errors add to their authority as powerful, important, independent, and anti-inflationary policymakers.

Commentary by James Forder, 24 September 2014