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macroeconomics_and_the_phillips_curve_myth [2016/02/21 14:30]
will [Inflationism, with and without the Phillips curve] |
macroeconomics_and_the_phillips_curve_myth [2019/11/08 10:39] (current)
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| //Macroeconomics and the Phillips Curve Myth// by [[wp>James Forder]], 2014, Oxford: Oxford University Press | //Macroeconomics and the Phillips Curve Myth// by [[wp>James Forder]], 2014, Oxford: Oxford University Press |
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| A [[http://hope.econ.duke.edu/sites/hope.econ.duke.edu/files/Hoover%20Forder%20Review%20%28CHOPE%29.pdf|4-page review of the book]] by Kevin Hoover for the //Balliol Annual Record// covers its main arguments succinctly. | A [[http://hope.econ.duke.edu/sites/hope.econ.duke.edu/files/Hoover%20Forder%20Review%20%28CHOPE%29.pdf|4-page review of the book]] (pdf) by Kevin Hoover for the //Balliol Annual Record// covers its main arguments succinctly. |
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| **Note:** if you have access to the full version, each chapter is summarised adequately in its own concluding section, so a good overview of the book could be obtained by reading the introduction and then successive conclusions in turn. | **Note:** if you have access to the full version, each chapter is summarised well in its own concluding section, so a good overview of the book can be obtained by reading the introduction and then successive conclusions in turn. |
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| The "story" of the Phillips curve is one of the most widely believed about the history of economics, consisting of the following basic assertions: | The "story" of the Phillips curve is one of the most widely believed about the history of economics, consisting of the following basic assertions: |
| ===== Phillips' work and its reception ===== | ===== Phillips' work and its reception ===== |
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| The easiest mistake to correct is that Phillips was the first to suggest a negative relation between wages and unemployment. Work in this area started with Hume in 1752, with work intensifying in the first half of the 20th century, notably including Irving Fisher (1926) and Tinbergen (1937), who used work done by the Netherlands Statistical Office and won the Nobel Prize in 1969. A large number of other authors published work in this area in the 1950s such that the idea that Phillips work was novel in any respect is not remotely credible. It was rushed into print to meet a publishing deadline, and so the extensive comments of at least one referee were ignored. | The easiest mistake to correct is that Phillips was the first to suggest a negative relation between wages and unemployment. Work in this area started with Hume in 1752, with work intensifying in the first half of the 20th century, notably including Irving Fisher (1926) and Tinbergen (1937), who used work done by the Netherlands Statistical Office and won the Nobel Prize in 1969. A large number of other authors published work in this area in the 1950s such that the idea that Phillips' work was novel in any respect is not remotely credible. It was rushed into print to meet a publishing deadline, and so the extensive comments of at least one referee were ignored. |
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| Nor was it well received, or considered important at the time. Philips himself described it as a "rush job", "quick and dirty" and dismissed it as a "wet weekend's work". The econometric techniques (to describe them favourably) were rudimentary, at times ad hoc, and widely criticised. Some authors reviewing his work much later see an ingenuity in his rudimentary approach that suggests they are not familiar with previously standard statistical techniques that were used to make quick estimations (that would not normally make their way into published journals) when computational power was still prohibitively expensive. | Nor was it well received, or considered important at the time. Philips himself described it as a "rush job", "quick and dirty" and dismissed it as a "wet weekend's work". The econometric techniques (to describe them favourably) were rudimentary, at times ad hoc, and widely criticised. Some authors reviewing his work much later see an ingenuity in his rudimentary approach that suggests they are not familiar with previously standard statistical techniques that were used to make quick estimations (that would not normally make their way into published journals) when computational power was still prohibitively expensive. |
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| > [O]f all the surveys and historical treatments... Santomero and Seater's is most notable. Determined that Phillips should be the inspiration of the literature, but unable to see why, they ask why it was that his 'competitors and their insights were ignored at the time'. The simple answer to that is that Phillips so-called competitors and their insights were not ignored at the time. It was Phillips who was disparaged immediately and later, while others were much more highly regarded. ((pp17-18)) | > [O]f all the surveys and historical treatments... Santomero and Seater's is most notable. Determined that Phillips should be the inspiration of the literature, but unable to see why, they ask why it was that his 'competitors and their insights were ignored at the time'. The simple answer to that is that Phillips' so-called competitors and their insights were not ignored at the time. It was Phillips who was disparaged immediately and later, while others were much more highly regarded. ((pp17-18)) |
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| ===== Popperianism, 1958 ===== | ===== Popperianism, 1958 ===== |
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| It is puzzling why Lipsey's much stronger paper on the subject (1960) used Phillips' as a starting point, when so much better work had already been done. One explanation for this is the fashionably influence of Popper's work (1959) on Lipsey over the course of the late 1950s. Economics had been struggling with the question of whether any stable, underlying laws were discoverable, or whether economic enquiry would forever be limited to the discovery of short-term stable relationships through econometric work, that would always break down as unconsidered factors shifted over time. Popper's proposal of falsifiability as the sine qua non of science brought this challenge into clearer focus: economics needed to propose bold, powerful hypotheses for underlying laws, not 5-year relationships discovered through data-trawling. The one novelty that Phillips' 1958 paper did supply over previous work was that big idea: he had analysed a century of data and suggested that a relationship might exist that was consistent throughout. That suggestion, rather than any of Phillips' analysis, could understandably have appealed to Lipsey. | It is puzzling why Lipsey's much stronger paper on the subject (1960) used Phillips' as a starting point, when so much better work had already been done. One explanation for this is the fashionable influence of Popper's work (1959) on Lipsey over the course of the late 1950s. Economics had been struggling with the question of whether any stable, underlying laws were discoverable, or whether economic enquiry would forever be limited to the discovery of short-term stable relationships through econometric work, that would always break down as unconsidered factors shifted over time. Popper's proposal of falsifiability as the sine qua non of science brought this challenge into clearer focus: economics needed to propose bold, powerful hypotheses for underlying laws, not 5-year relationships discovered through data-trawling. The one novelty that Phillips' 1958 paper did supply over previous work was that big idea: he had analysed a century of data and suggested that a relationship might exist that was consistent throughout. That suggestion, rather than any of Phillips' analysis, could understandably have appealed to Lipsey. |
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| ===== The L-shaped aggregate supply curve ===== | ===== The L-shaped aggregate supply curve ===== |
| ===== Theory of wages, 1958 ===== | ===== Theory of wages, 1958 ===== |
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| Phillips' 1958 paper did make an extraordinary claim, but in order to understand it is necessary to briefly summarise the consensus on wage determination by the late 1950s. It was widely accepted that, while wage rates were limited in the extreme by market forces, the exact level of wages was essentially a non-economic problem: people negotiated, and the outcome of those negotiations rested on a long list of intangibles, concepts like "fairness" that economists had no place discussing. The outcome of negotiations was mainly determined by | Phillips' 1958 paper did make an extraordinary claim, but in order to understand it it is necessary to briefly summarise the consensus on wage determination by the late 1950s. It was widely accepted that, while wage rates were limited in the extreme by market forces, the exact level of wages was essentially a non-economic problem: people negotiated, and the outcome of those negotiations rested on a long list of intangibles, concepts like "fairness" that economists had no place discussing. The outcome of negotiations was mainly determined by |
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| - changes in the cost of living, | - changes in the cost of living, |
| ===== Responses to Samuelson and Solow ===== | ===== Responses to Samuelson and Solow ===== |
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| Contemporary comments on the paper tend to conform to this reading: most cite the paper in support of the idea that the Phillips curve was not a stable phenomenon in America (e.g. Bronfenbrenner and Holzman, Shonfield, and Kuh). The few that seem to have understood the paper as suggesting a stable relationship reject that view. Many citations of the paper ignore their mention of the Phillips curve. | Contemporary comments on the paper tend to conform to this reading: most cite the paper in support of the idea that the Phillips curve was not a stable phenomenon in America (e.g. Bronfenbrenner and Holzman, Shonfield, and Kuh). The few that seem to have understood the paper as suggesting a stable relationship reject that view. Many citations of the paper ignore its mention of the Phillips curve. |
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| > [I]t does not appear that there is any author in that period who could be said to have adopted the idea that inflation is beneficial because of Samuelson and Solow's paper, nor any who could be said to have found in the article inspiration for inflationist policy. ((p43-44.)) | > [I]t does not appear that there is //any// author in that period who could be said to have adopted the idea that inflation is beneficial because of Samuelson and Solow's paper, nor any who could be said to have found in the article inspiration for inflationist policy. ((p43-44.)) |
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| ===== Later comments on their paper ===== | ===== Later comments on their paper ===== |
| The majority of papers during this period are hostile to inflation and do not consider the possibility of tolerating anything less than price stability in exchange for benefits such as higher employment. The general hostility is sufficient to be highly sceptical of any suggestion that authors were implying such conclusions through their silence. There are a minority that do intimate that they would tolerate moderate inflation to reduce unemployment, usually hesitantly, and one (Bodkin et al for the Economic Council of Canada) that goes as far as to calculate steady state equations to inform policymakers' choices (although they express scepticism about its applicability). | The majority of papers during this period are hostile to inflation and do not consider the possibility of tolerating anything less than price stability in exchange for benefits such as higher employment. The general hostility is sufficient to be highly sceptical of any suggestion that authors were implying such conclusions through their silence. There are a minority that do intimate that they would tolerate moderate inflation to reduce unemployment, usually hesitantly, and one (Bodkin et al for the Economic Council of Canada) that goes as far as to calculate steady state equations to inform policymakers' choices (although they express scepticism about its applicability). |
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| > So there is Phillips curve inflationism. There is not much of it, but it is there. As Laidler (1997) noted, the first such inflationist was not Phillip (1958), nor Samuelson and Solow (1960), but Reuber (1962). Laidler could have gone further in noting how little followed. Amongst the British wore, there is nothing; amongst the American, there is a very small amount... In what is certainly a point that raises a further question, it could also be said that all the unhesitant, most clear-cut, and least equivocal cases of well-considered Phillips curve inflationism, of the 1960s were Canadian. ((pp74-75)) | > So there is Phillips curve inflationism. There is not much of it, but it is there. As Laidler (1997) noted, the first such inflationist was not Phillip (1958), nor Samuelson and Solow (1960), but Reuber (1962). Laidler could have gone further in noting how little followed. Amongst the British wore, there is nothing; amongst the American, there is a very small amount... In what is certainly a point that raises a further question, it could also be said that //all// the unhesitant, most clear-cut, and least equivocal cases of well-considered Phillips curve inflationism, of the 1960s were Canadian. ((pp74-75)) |
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| ===== The extent of inflationism ===== | ===== The extent of inflationism ===== |
| Having established "the proper context" for remarks relating to inflation, many authors' comments are analyzed, especially relating to incomes and manpower policy.((Respectively, policy on negotiating agreements that would control wage increases, and government support for redeployment of labour from one industry to another.)) In general their advocacy of or tolerance for higher inflation is found to be much weaker than depicted in more recent writing, and its connection to the Phillips curve (at least as a stable, exploitable relationship) weaker. | Having established "the proper context" for remarks relating to inflation, many authors' comments are analyzed, especially relating to incomes and manpower policy.((Respectively, policy on negotiating agreements that would control wage increases, and government support for redeployment of labour from one industry to another.)) In general their advocacy of or tolerance for higher inflation is found to be much weaker than depicted in more recent writing, and its connection to the Phillips curve (at least as a stable, exploitable relationship) weaker. |
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| It's also worth mentioning that there is evidence in the 1960s that economists believed anti-inflation sentiment had //hardened// since the 1950s. The most explicit statement of this is in Samuelson's textbook, Economics, which in 1948 "said that 5 per cent steady inflation is not too serious"((p131)) -- by 1955 this had fallen to 3 per cent and, by 1961, 2 per cent. | It's also worth mentioning that there is evidence in the 1960s that economists believed anti-inflation sentiment had //hardened// since the 1950s. The most explicit statement of this is in Samuelson's textbook, //Economics//, which in 1948 "said that 5 per cent steady inflation is not too serious"((p131)) -- by 1955 this had fallen to 3 per cent and, by 1961, 2 per cent. |
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| Much of this writing was in less formal contexts (lectures, journalism, representations to policymakers, books) and can be seen as an effort to "get the word out" to non-economists rather than arguments for a technical audience. The message, such as it existed, should be interpreted as | Much of this writing was in less formal contexts (lectures, journalism, representations to policymakers, books) and can be seen as an effort to "get the word out" to non-economists rather than arguments for a technical audience. The message, such as it existed, should be interpreted as |
| - There were good reasons to be relaxed about low inflation. | - There were good reasons to be relaxed about low inflation. |
| - Even those authors who can be cherry-picked as favouring inflation understood real and nominal variables. | - Even those authors who can be cherry-picked as favouring inflation understood real and nominal variables. |
| - The change in attention to the Phillips curve is the opposite of the conventional story: in the 1970s the curve is both discussed and applied to policy more than prior to Friedman (1968). | - The change in attention to the Phillips curve is the opposite of the conventional story: in the 1970s the curve is both discussed and applied to policy //more// than prior to Friedman (1968). |
| - The whole discussion is notably similar through the period, changing only due to events rather than important theoretical leaps. | - The whole discussion is notably similar through the period, changing only due to events rather than important theoretical leaps. |
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| ===== The general picture ===== | ===== The general picture ===== |
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| > There is... nothing in the policy record to suggest that 'the Phillips curve', or 'the tradeoff'. or the same thing by any other name had any role in motivating or influencing policy. ((p147)) | > There is... nothing in the policy record to suggest that 'the Phillips curve', or 'the tradeoff', or the same thing by any other name had any role in motivating or influencing policy. ((p147)) |
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| Given that the academic literature had provided a range of viable justifications for modest inflation (see 5.4), it is somewhat surprising that policymakers remain so committed to price stability throughout the 1960s and 1970s.((In fact, inflation does not gain acceptance in these circles until the failure and abandonment of disinflationary policy in the 1980s.)) | Given that the academic literature had provided a range of viable justifications for modest inflation (see 5.4), it is somewhat surprising that policymakers remained so committed to price stability throughout the 1960s and 1970s.((In fact, inflation does not gain acceptance in these circles until the failure and abandonment of disinflationary policy in the 1980s.)) |
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| In the UK, the history of Chancellors' speeches emphasize the constant tension between unemployment (demand) and the balance of payments deficit. Costs and prices were controlled quite separately (in the minds of the policymakers) by incomes policy, which was uniformly perceived as a means of obtaining the prices and wages that would prevail under perfect competition (rather than an attempt to 'subvert the market'). | In the UK, the history of Chancellors' speeches emphasize the constant tension between unemployment (demand) and the //balance of payments deficit//. Costs and prices were controlled quite separately (in the minds of the policymakers) by incomes policy, which was uniformly perceived as a means of obtaining the prices and wages that would prevail under perfect competition (rather than an attempt to 'subvert the market'). |
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| Both the Nixon and Heath governments stated their intent to reduce state management of the economy, but when that led to inflation that was not constrained by high unemployment, both backtracked with incomes policy and reflation. | Both the Nixon and Heath governments stated their intent to reduce state management of the economy, but when that led to inflation that was not constrained by high unemployment, both backtracked with incomes policy and reflation. |
| The first antecedents of the Phillips curve myth can be seen emerging at the end of the 1960s, but it is fully established in the literature with "remarkable" suddenness between 1975 and 1977. From there it made the leap to textbooks by 1978, including to many that had previously contained accurate accounts. Even more oddly, alongside the new assertion that economists had believed in an obviously flawed model for a decade, | The first antecedents of the Phillips curve myth can be seen emerging at the end of the 1960s, but it is fully established in the literature with "remarkable" suddenness between 1975 and 1977. From there it made the leap to textbooks by 1978, including to many that had previously contained accurate accounts. Even more oddly, alongside the new assertion that economists had believed in an obviously flawed model for a decade, |
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| > the lubrication argument disappears, even when it had been present in earlier editions. This gives the impression that the supposed inflationism had no explanation, except a failure to understand the expectations argument, bet it also seems to show those authors as being overly anxious to display errors in the thinking of the past.((pp161-2)) | > the lubrication argument disappears, even when it had been present in earlier editions. This gives the impression that the supposed inflationism had no explanation, except a failure to understand the expectations argument, but it also seems to show those authors as being overly anxious to display errors in the thinking of the past.((pp161-2)) |
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| Over the next few years it was cited routinely by a range of authors of "high standing" without citation, collectively giving the impression that it was universally accepted as fact. One of many examples is the opening lines of Feldstein (1979): | Over the next few years it was cited routinely by a range of authors of "high standing" without citation, collectively giving the impression that it was universally accepted as fact. One of many examples is the opening lines of Feldstein (1979): |
| - Friedman challenged his peers to provide a sturdy theoretical model of cost-push inflation -- critical to much of the foregoing work -- and nobody did. | - Friedman challenged his peers to provide a sturdy theoretical model of cost-push inflation -- critical to much of the foregoing work -- and nobody did. |
| - The expectations argument was refuted again and again in subsequent econometric work, but the authors "all allow the econometrics to speak for itself in showing Friedman to be wrong, giving no explanation of what economic behaviour might underlie such a result."((p191. **Further: end p191**)) | - The expectations argument was refuted again and again in subsequent econometric work, but the authors "all allow the econometrics to speak for itself in showing Friedman to be wrong, giving no explanation of what economic behaviour might underlie such a result."((p191. **Further: end p191**)) |
| - In presenting his thesis, Friedman (1968) simply assumes that the economy is at the natural rate of unemployment, whereas the accepted Keynesian methods for using demand to reduce unemployment //without raising inflation// applied when this was not the case. The "amazing"((p192, and noted later by Hahn (1982) and de Vroey (1998))) lack of response to Friedman on this point allowed the actual techniques of demand management to be overshadowed by a straw man. | - In presenting his thesis, Friedman (1968) simply assumes that the economy is at the natural rate of unemployment, whereas the accepted Keynesian methods for using demand to reduce unemployment //without raising inflation// applied when this was not the case. The "amazing"((p192, and noted later by Hahn (1982) and de Vroey (1998) )) lack of response to Friedman on this point allowed the actual techniques of demand management to be overshadowed by a straw man. |
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| ===== The circumstances in which the myth developed ===== | ===== The circumstances in which the myth developed ===== |
