Macroeconomics and the Phillips Curve Myth

by James Forder

This book reconsiders the role of the Phillips curve in macroeconomic analysis in the first twenty years following the famous work by A. W. H. Phillips, after whom it is named. It argues that the story conventionally told is entirely misleading. In that story, Phillips made a great breakthrough but his work led to a view that inflationary policy could be used systematically to maintain low unemployment, and that it was only after the work of Milton Friedman and Edmund Phelps about a decade after Phillips' that this view was rejected. On the contrary, a detailed analysis of the literature of the times shows that the idea of a negative relation between wage change and unemployment - supposedly Phillips' discovery - was commonplace in the 1950s, as were the arguments attributed to Friedman and Phelps by the conventional story. And, perhaps most importantly, there is scarcely any sign of the idea of the inflation-unemployment tradeoff promoting inflationary policy, either in the
theoretical literature or in actual policymaking. The book demonstrates and identifies a number of main strands of the actual thinking of the 1950s, 1960s, and 1970s on the question of the determination of inflation and its relation to other variables.

The result is not only a rejection of the Phillips curve story as it has been told, and a reassessment of the understanding of the economists of those years of macroeconomics, but also the construction of an alternative, and historically more authentic account, of the economic theory of those times. A notable outcome is that the economic theory of the time was not nearly so naive as it has been portrayed.

Genres: Economics, Nonfiction

318 pages, Hardcover

First published October 9, 2014

Reviews

[Stephen Lee · Rating 4 out of 5]

This is a detailed book, and I felt it wasn't really aimed at a non-specialist like me, but I did feel that I got something out of the book. My understanding of what the book is saying is as follows. In his 1976 Nobel lecture, Milton Friedman claimed that economists had promoted inflationist policies on the basis that the Phillips curve meant that this would lower unemployment, and he explained that in reality inflation would produce expectations of further inflation which would cancel out any benefit. Forder argues that Friedman's claim is a myth. In the 1960s and 1970s hardly anyone was promoting inlationist policies, and the Phillips curve wasn't seen as something that was set in stone. Some people put forward the 'lubrication' argument for a moderate level of inflation. This argued that since workers are understandably very resistant to a cut in (money) wages, a reasonable level of inflation would allow real wages to drop slightly in weak sectors of the economy, rather than having large scale business closures. Also when the Phillip's curve was mentioned people asked what policies would shift it to allow lower unemployment whilst still maintaining low inflation. Indeed lowering inflation was always seen as a policy goal.

I did feel that there were a few things Forder could have done to make it more readable by the non-specialist.
A central theme in the book is that economists weren't promoting inflationist policies. But inflation grew anyway, so a discussion of why this happened would be useful. (To be fair he does mention the cost of the Vietnam War). Also this is a book about a graph, and arguments such as whether the curve is really vertical. I felt a few graphics illustrating the curves being talked about wouldn't have gone amiss. A bit biographical information about Phillips would also have been interesting, for example his job as a crocodile hunter, but more importantly, the economic models he constructed. Nowadays you might use a spreadsheet, but this was long before spreadsheets were invented, and most of the computers around were being used for designing bombs. So Phillips designed a hydraulic computer https://en.wikipedia.org/wiki/MONIAC. Forder does mention Phillips 1954 paper, which looks like it has a lot of Moniac-style flowcharts, and I think that it would have been useful to see how much Phillips was into computer modelling. Forder tells us that one of the reasons the Phillips curve became well known was because it was thought to offer a falsifiable prediction, so fitting in to Popperian philosophy of science. But computer modelling provides a different philosophy, models can always be tuned to fit new data, so there's the question of what tuning is acceptible. I thought some discussion of this in the book would have been interesting.

Although I didn't follow all of Forder's arguments in detail, I felt that I got a lot out of the book. Most of all I see this book as an example of how digging into the literature can help to show inaccuracies in our current beliefs about an earlier period of time.

(A longer version of this review, including a look at why the Phillips curve is like the Higgs Boson, can be found at http://thepeopleseconomics.org/forum/...)