"The Short and Long-Run Phillips Curves: Did Samuelson and Solow claim that the Phillips Curve was a structural relationship showing a permanent tradeoff between inflation and unemployment? James Forder says no.
Paul Krugman, John Quiggin and others (including me) have argued that the one success of the critics of old Keynesian economics is the prediction that high inflation would become persistent and lead to stagflation. The old Keynesian error was to assume that the reduced form Phillips curve was a structural equation -- an economic law not a coincidence.
Quiggin and many others including me have noted that Keynes did not make this old Keynesian error... The old Keynesian error, if it occurred, was made later. I have claimed (in a lecture to surprised students) that it was made by Samuelson and Solow. Was it ?
This is an important question in the history of economic thought, because the alleged error serves as a demonstration of the necessity of basing macroeconomics on microeconomic foundations. For a decade or two (roughly 1980 through roughly 1990 something) it was widely accepted that, to avoid such errors, macroeconomists had to assume that agents have rational expectations even though we don't.
The pattern of a gross error by two economists with impressive track records and an important success based on an approach which has had difficultly forecasting or even dealing with real events ever since made me suspect that the actual claims of Samuelson and Solow have been distorted by their critics. To be frank. this guess is also based on a strong sense that the approach of Friedman and Lucas to rhetoric and debate is more brilliant than fair.
I am very lazy, so I have been planning to Google some for months. I finally did. ... I googled samuelson solow phillips curve
The third hit is the 2010 paper by Forder which discusses Samuelson and Solow (1960) (which I have never read). ... Forder quotes p 189
'What is most interesting is the strong suggestion that the relation, such as it is, has shifted upward slightly but noticeably in the forties and fifties'So in the paper which allegedly claimed that the Phillips curve is stable, Solow and Samuelson said it had shifted up. Rather sooner than Friedman and Phelps no ?
So how has it become an accepted fact that Samuelson and Solow said the Phillips curve was stable ? This fact is held to be vitally centrally important to the debate about macroeconomic methodology and it is obviously not a fact at all. How can it be that a claim about what was written in one short clear paper is so central to the debate and that no one checks it ?
They did caption a figure with a Phillips curve "a menu of policy choices" but (OK this is a paraphrase not a quote)
After this they emphasized – again – that these 'guesses' related only to the 'next few years', and suggested that a low-demand policy might either improve the tradeoff by affecting expectations, or worsen it by generating greater structural unemployment. Then, considering the even longer run, they suggest that a low-demand policy might improve the efficiency of allocation and thereby speed growth, or, rather more graphically, that the result might be that it 'produced class warfare and social conflict and depress the level of research and technical progress' with the result that the rate of growth would fall.So, finally after months of procrastinating, I spent a few minutes (at home without access to JStor) checking the claim that is central to the debate on macroeconomic methodology and found a very convincing argument that it is nonsense.
If that were possible, this experience would lower my opinion of macroeconomists (as always Robert Waldmann explicitly included)."
Kevin Donoghue said...
There's a lot of this sort of thing in economics.
http://web.econ.unito.it/bagliano/macro3/samsol_aer60.pdf
the S and S boys needed to be sand bagged
adaptive expectaions are as old as phil kagan's paper from the 50's
point of this libel ?
discredit the synthesis club that advocated fiscal activism
and a hot job market
post K rev wage push inflation was first "experienced " here during the post war truman boom
abba lerner ounced on it with a fairly blunt and broad brush
scheme for nominal wage change control thru a mechanism
this went thru 3o plus years of refinement
and came out as MAP
http://books.google.com/books/about/MAP_a_market_anti_inflation_plan.html?id=nlkPAQAAMAAJ
a pamphlet of great merit
today such a set of systems in each euro zone nation could solve the present i8ntrazonal
relative national wage and product price level imbalances in a jiffy
One quibble:
"This is an important question in the history of economic thought, because the alleged error serves as a demonstration of the necessity of basing macroeconomics on microeconomic foundations."
No, it does not. And I am surprised that Waldmann makes such a claim.
All the alleged error suggests is that we must get the structural relationships right. How we go about doing that is an open question.
Despite his reputation as an exponent of (literally) “hydraulic" ” Keynesianism, Phillips did not endorse a mechanical interpretation of the curve. He is said to have remarked that “if I had known what they would do with the graph I would never have drawn it.” ” The leading American Keynesian economists of the day, Paul Samuelson and Robert Solow, were less cautious, particularly in their popular writing.
In an influential article, Samuelson and Solow estimated a Phillips curve for the United States, and drew the conclusion that society faced a trade-off between unemployment and inflation. That is, society could choose between lower inflation and higher unemployment or lower unemployment and higher inflation. Although the article qualified this point with reference to possible effects on inflationary expectations, this qualification tended to get lost in discussion of the policy implications of the Phillips curve.
The trade-off between unemployment and inflation was spelt out in successive editions of Samuelson’s textbook, simply entitled Economics, which dominated the market from its initial publication in 1948 until the mid-1970s. Given a menu of choices involving different rates of unemployment and inflation, it seemed obvious enough that, since unemployment was the greater evil, a moderate increase in inflation could be socially beneficial.
Neo-classical theory (rational expectations, microfoundations view of the world) would state that this extra cost would lower tardiness... but it didn't. The parents actually began to be more tardy. So much so that the parents picking up their kids tardy more than doubled. Then, when the fees were removed, the higher rate of tardiness continued.
It seems very illogical. But the explanation looks to the fact that at the start the parents viewed arriving tardy as a social norm. And that kept them in check. Then, when arriving late became a private cost, they decided it was affordable to arrive late.
Two key notes here...
Social norms have a profound effect on economic activity. Even the fears of living wages implemented in many towns turned out to be unwarranted.
Also, when the fee was deregulated (removed), the increased anti-social behavior of the parents continued. Therefore, unwise regulations leading to deregulation could lead to bigger problems.
So as the neo-classical economists push so heavily for deregulation, are they thinking about how to reinstate healthy social norms?
The general assumption among Keynesians in the 1960s was that there was a trade-off that could be exploited. That's certainly what filtered down to me as a high school econ student. And, I imagine, policymakers got much the same message.
1) The relationship between the rate of unemployment and the rate of inflation was first explored by William Phillips.
Actually Irving Fisher published a paper called "A Statistical Relationship between Price Changes and uneployment" in the International Labor Review in June, 1926.
2) The original Phillips Curve explored the relationship between the rate of unemployment and the rate of inflation.
Actually, the original Phillips curve ("The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957", Economica, November, 1958) explored the relationship between money wage changes and unemployment.
3) Phillips claimed his relationship was stable.
Phillips showed that the relationship was upset by periodic rapid increases in import prices which led to wage price spirals.
4) Friedman claimed others thought the relationship was stable.
In a footnote to his 1968 AEA address (The Role of Monetary Policy, The American Economic Review, March 1968) Friedman states the conditions under which the relationship might be stable (when the average rate of prices, and hence the expected rate of change in prices, is stable). So, even Friedman didn't claim that others thought it was stable.
In fact, as Forder points out, a careful reading of the literature of the time reveals that claims that anyone thought there was a stable exploitable relationship, didn't seem to occur until at least the the mid 1970s, when it was already quite clear that there wasn't one.
In short, the claims concerning stability are all largely a myth.
“the menu of choice between different degrees of unemployment and price stability, as roughly estimated from the last twenty-five years of American data.” (p. 192)
however:
“It would be wrong, though, to think that our… menu that relates obtainable price and unemployment behaviour will maintain its same shape in the longer run. What we do in a policy way during the next few years might cause it to shift in a definite way.” (p. 193)
Samuelson and Solow found that the US experience during the depression and the two world wars was inconsistent with Phillips hypothesis, most strikingly between 1933 and 1941 during the depths of the great depression US money wages either increased or failed to decrease despite exceptionally high levels of unemployment. They also noticed a slight upward shift in the PC in the 1940’s and 1950’s suggesting a lack of stability in the relationship. However the majority of observations demonstrated a relatively consistent pattern, that wages tended to increase when unemployment was low, and the lower the level of unemployment the faster they rose.
As to the contribution of Friedman towards the "expectations augmented" Phillips Curve, Phillips' second paper plotting a relationship between (wage) inflation and unemployment in post-WW2 Australia included lagged wage inflation as an explanatory variable, and therefore was an expectations augmented Phillips curve. Not many economists seem aware of this work, probably because it relates to post-war Australia, and was not published in a major journal.
So Phillips invented the expectations augmented Phillips curve rather than Friedman or Phelps. Friedman and Phelps' innovation was to argue that the coefficient on the inflation expectations variable should always be 1- and that there was no "trade-off" between inflation and unemployment in the long run.
Again, Phillips never claimed the relationship was structural- his 1958 and 1959 papers only pointed out particular periods during which the relationship held with surprising regularity.
and a leaflet book plug
name drop
that reads
my book on this is "....."
where's the days of brad setser blogs
where the local river god answered in comments
i recall delong was always above that
our host used to climb down here when hectored sufficiently
and dean baker used to roll up the sleeves
and are wrestle the unwashed here in the cages
brad though took the cake
even though he wouldn't respond
he would on occasion
" insert"deus ex machina
host thunder bolts
right in an offending comment
jaimie galbraith was always the most generous visiting big foot
and waldmann has an arrogance that taketh not hizzseff seriously he'd roll around in the mud here too
splendid
but alas now
big foot elbow rubbing
is as rare as ...
not assuming the can opener
Sure there's a tendency for the level of unemployment to affect wages, but it is far, far from a "law." There are so many other forces at work at any given time. Does anyone seriously think that if we moved towards full employment now -- say with the massive infrastructure investment the country actually needs -- correcting our historically depressed wage structure would degenerate into an out-of-control wage-price spiral? Given the weakness of labor and the length of time that workers have been beaten down into accepting whatever crumbs an employer will drop on the floor, especially when compared to the time of relative labor strength when these theories were being developed, the very notion that a wage-price spiral could emerge in the foreseeable future is a joke. The "NAIRU" is a joke.
"Full employment" should be the battle cry of all progressives, and that means not matching some imaginary (and fictional) "natural rate of employment," but actually continuing to strive for lower unemployment until there are no longer workers who want a full-time job who can't find one quickly.
The way to get around the Friedman hypothesis is that the government should 'err' on the side of employment - given that there is uncertainty in the macro variables. When the government is wrong, then you get more inflation. So, in that limited sense, there is indeed a 'trade-off' between inflation and employment.
What is more striking is how seriously everybody took the whole Friedman-Phelps formulation of a long-run vertical Phillips curve, given that we have never seen such a thing empirically anywhere ever. What supposedly swayed the argument to their view was the stagflation of the 1970s, but that was clearly a rightward shift of the old PC due to supply-side, cost-push shocks, which PAS readily discussed in the editions of his Economics during the 1970s. The old cost pushers always recognized that higher expectations of inflation could induce wage-price spirals that would show up in such a shift.
Of course the other bogeyman was NAIRU, actually the invention of Okun, supposedly a Keynesian. There was never any reason given by Friedman or Phelps to believe that there should be a NAIRU, or that even if there was it should equal the supposedly "natural rate of unemployment" supposedly located where that vertical PC was. And at least Phelps always recognized endogeity of the natural rate to the rate of unemployment itself as the hysteresis crowd argued.