Arnold Kling  

Milton Friedman and the Phillips Curve

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I have agreed to write something on the history of the Phillips Curve, so I may post on the topic from time to time.

The heyday of the Phillips Curve was 1956-1969. In that fourteen year period:

--unemployment was below 4.25 percent in five years--1956, 1966, 1967, 1968, and 1969. In those years, inflation ranged between 2.8 percent and 5.9 percent, with an average of about 4.0 percent.

--unemployment was between 4.25 and 5.5 percent in four years--1957, 1959, 1964, and 1965. In those years, inflation ranged between 1.2 percent and 3.0 percent, with an average of 1.8 percent.

--unemployment was over 5.5 percent in five years--1958, 1960, 1961, 1962, and 1963. In those years, inflation ranged between 0.7 percent and 1.8 percent, with an average of about 1.3 percent.

It seemed obvious, then, that low unemployment caused high inflation, and high unemployment caused low inflation.

Of course, to Milton Friedman, it was far from obvious. He thought you could have high unemployment with high inflation, if the money supply was growing rapidly. Inflation is a monetary phenomenon.

In the 1970's, we had high unemployment with high inflation. There is a narrative that says that this vindicated Friedman and drove the Phillips Curve out of macroeconomics.

Except that the Phillips Curve did not die. I encountered it just the other day. As for Friedman, there is a fight going on between those who think that he would support the current monetary expansion (e.g., David Beckworth) and others who vehemently disagree (e.g., John Taylor).

On this purely hypothetical issue, I think I side with Taylor. I don't think Friedman would argue for trying to undo a monetary mistake by making a mistake in the opposite direction. If there is no Phillips Curve going forward, then a monetary expansion now will cause more inflation without reducing unemployment.

I do not count myself as a Friedman disciple. But I think the Recalculation Story would suggest that we won't get much out of monetary loosening, other than additional inflation.

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CATEGORIES: Macroeconomics

COMMENTS (6 to date)
david writes:

Stagflation drove the long-run Phillips curve out of mainstream macro, but even Friedman explicitly pushed the existence of the short-run Phillips tradeoff.

R Richard Schweitzer writes:

Monetary "Policy."

Is most of what serves the functions of "money" (the subject of the "Policy") some form of credit?

Is the "value" (or stability) of credit impaired by intentional inflationary actions - fiscal and monetary?

Is the larger portion of "capital" comprised of credit?

Is capital then impaired by an impairment of credit?

Does capital impairment affect employment in a distributive economy operating as a market or exchange of services system?

If "Yes" to the above, what is coming next?

Ed Hanson writes:


Strange choice of words you use. Friedman did not push the existence of the short term Phillips Curve, he showed that it did exist. He also demonstrated that once the illusion ended the inflation remained and the GDP growth did not. He definitely did not think the trade off was positive.

All, if you want to know what Friedman would say, just read Free To Choose, or if you can't read, just watch it. Friedman recognized that the world was more competitive than ever, and the US is doing two things terrible wrong. It has kept its corporate tax rate at an uncompetitive level, and has increased its regulatory regime to unjustifiable levels.

It must be remembered that Milton Friedman was a great and complete economist. He may have won the Nobel Prize for his exceptional work on Monetary policy, but that should in no way hide his great work on tax, regulatory, and free enterprise. He was a great spokesman for individual freedom without onerous government.

Hyena writes:

I think speculating about what a dead man would think is one of the worst tendencies of mankind. Who cares what Friedman would have thought? Why should they?

Were he alive today he'd think something or other, he'd have reasons for it and the vast majority of us would think him a kook or a genius based on the reasons.

AJ writes:

Arnold, I thought the resolution of this was that (if there is anything like a Phillips curve) that the appropriate variable on the vertical axis was "unexpected inflation." Thus, in the 1960's inflation itself was unexpected (or relatively novel at least) and so the relationship appeared to hold with inflation and unemployment. Then as inflationary expectations get built in, you need to have even more inflation to get unexpected price increases to have unemployment above the normal level. Then you need to have the Reagan recession of '81-'83 to ring out inflationary expectations.


Aleks Schaefer writes:


I find Friedman’s conclusions regarding the trade-off between inflation and unemployment dubious at best. In evaluating Friedman’s purported demonstration of the existence of a short run Phillip’s Curve, we must examine the degree to which his assumptions depict reality accurately. Friedman assumes backward looking, ever-ignorant workers who can be continuously outwitted by Central Bankers through the expansion of the money supply (while firms play the role of omnipotent slave-drivers who are never tricked by the Central Bankers shenanigans, and can thus exploit “fooled” workers).

I have also read (and watched) Free to Choose, and I am discouraged by the simplicity with which he presents the world. Concepts like firms’ leverage over workers, the troubled past of Hong Kong, and international human rights violations are never addressed in his passionate defense of free enterprise.

While it may be true that he was a “great and complete economist,” it is equally true that we must acknowledge his faults before we can support the ideas he represented.

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