Eh.net Book Review: Macroeconomics and the Phillips Curve Myth

James Forder, Macroeconomics and the Phillips Curve Myth. Oxford: Oxford University Press, 2014. ix + 306 pp. $90 (hardcover), ISBN: 978-0-19-968365-9.

Reviewed for EH.Net by Sandeep Mazumder, Department of Economics, Wake Forest University.

The Phillips curve has long been considered a workhorse of modern macroeconomics, and the term is thrown around frequently by both academics and central bankers alike, without much consideration as to its origin. In his book, James Forder forces us to reconsider the inception of this term, and how the model itself developed in the 1960s and 1970s in the macroeconomics literature.

In particular, in response to the foundational work of A.W.H. Phillips (1958) — where the negative relationship between inflation and unemployment is posited — three other papers stand head and shoulders above the others in the formation of the literature. Namely, Paul Samuelson and Robert Solow (1960) who argue that policymakers can choose a point along the Phillips curve, and then Edmund Phelps (1967) and Milton Friedman (1968) who introduced the movement of the curve itself via changes in inflation expectations.

At least, this is how the story goes according to the current literature. The author of this book argues that the true account of proceedings did not evolve in this aforementioned way at all. Further still, all of these so-called new findings to the literature were already widely known. Thus the term “myth” is used alongside “Phillips curve.”

In this book, James Forder successfully convinces the reader of many points, which indeed should force the current state of the inflation-unemployment literature to treat the formation of the story more carefully. For example, Phillips was not the first to discuss inflation-unemployment tradeoffs (David Hume, Irving Fisher, and Jan Tinbergen had already done so), while there is evidence that Phillips himself disregarded much of his own 1958 paper. Forder does an excellent job of highlighting Phillips’ key contributions, which does not include the discovery of an inflation (or wage change)-unemployment tradeoff. Namely, Phillips suggested that this relationship would be stable over time, and he was even revolutionary with his claims that wages were being driven by supply and demand without the need of considering social forces. Arguably, Phillips’ biggest contribution was the idea that an observable “law of motion” in economics might actually exist.

Likewise, Forder does a thorough job of convincing the reader that Samuelson and Solow (1960) were not pursuing “inflationism” in their paper, while Friedman (1968) was not the first to discuss expected price changes with regards to wage bargaining. Moreover, a persuasive case is made that Richard Lipsey (1960) is a paper that possibly belongs in the “hall of fame” when it comes to the formation of the Phillips curve as we know it today.

That being said, the book suffers from several problems with its arguments. One such problem is that the author condemns the literature for using the term “Phillips curve,” both in the past and today, in a way that does not resemble what Phillips had originally intended with his research back in 1958. Indeed it is true that the term “Phillips curve” can be used in a variety of different settings. But surely this makes Phillips’ contribution vital, not trivial. Yes, the model may not be used in the exact way he was originally thinking, but arguably he (and others) crucially began a new genre of the study of inflation-unemployment tradeoffs that has evolved in many different ways over the past few decades to what we have today. Another way of putting it is this: the curve today may not resemble what we find in Phillips (1958), but that does not mean that Phillips was not instrumental (whether by intention or fluke) in putting the subject matter at the forefront of macroeconomics, regardless of whether it happened a few years after he wrote or a few decades afterwards.

At times, the book also suffers from putting forth trivial arguments in too strong of a manner. For instance, the lack of self-citation of authors such as Samuelson, in no shape constitutes that they did not believe in their own previous work. Many economists simply prefer not to self-cite. Additionally, one could argue that many of the cited papers in this book are done so in a misguided and confused way. For example, the author says in chapter 7 that Guillermo Calvo “did not use the [New Keynesian Phillips Curve] expression.” Calvo’s pricing work was a foundational assumption that eventually led to the NKPC — he was not the originator of the model himself — so there is no reason to expect references to the NKPC in his work.

Furthermore, the author argues that several other researchers use Phillips curves without citing the original Phillips (1958) paper. This again in no way means that authors are not using Phillips’ work, but rather that it has become status quo in the literature to take the term “Phillips curve” for granted. Moreover, the author tries to argue that the Phillips curve was not relevant to policymaking, despite being used frequently in reports such as the Economic Report of the President. Does not the appearance of the term in the report in of itself constitute use by policymakers?

Another recurring problem in the book is that the author often makes strong arguments out of situations that do not warrant it. For instance, while the case for Friedman not being the first to bring inflation expectations to the model is well made, the fact remains that Friedman almost definitely is responsible for bringing the idea to the forefront of macroeconomic thinking given his prominence in the profession. Further still, in chapter 5 of the book, the author argues against the “inflationist” movement of the Phillips curve by presenting the case of those who were “anti-inflationists.” Is it any surprise, especially among macroeconomists, that there were people on either side of the debate? This does not represent a rejection of the Phillips curve, but rather a healthy debate about the merits of some of its implications. Indeed, the absence of “inflationist” ideas from policymakers’ own words (chapter 6) should also not be a surprise, and certainly does not constitute evidence against the Phillips curve. When would we ever expect a Federal Reserve official to publicly declare the benefits of inflation, even if they really thought it was true? Doing so would almost certainly be a death sentence on their own central banking career.

In conclusion, Forder has compelled me to consider Phillips’ role in the formation of the current model as we know it today more carefully, as well as the contributions of Samuelson, Solow, and Friedman. But I would imagine that this is true of almost anyone in history: if you look back in time, we probably frequently attribute more praise to certain individuals and not enough to others. Just ask Trevor Swan about his work on growth models! Regardless of whether this happened or not, the Phillips curve to this day remains a workhorse in macroeconomics when considering issues of price stability and full employment. Indeed, the policy implications are as vital as ever — not for picking a point on a menu of choices — but in terms of using the model to compute forecasts of possible future inflation rates, a point which is completely missed by the author. For these reasons, the Phillips curve is far from being a “myth.”

References:

Calvo, G.A. (1983) “Staggered Prices in a Utility-Maximizing Framework,” Journal of Monetary Economics, 12(3): 383-398.

Friedman, M. (1968) “The Role of Monetary Policy,” American Economic Review, 58(1): 1-17.

Lipsey, R.G. (1960) “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1862-1957: A Further Analysis,” Economica, 27(105), 1-31.

Phelps, E.S. (1967) “Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time,’ Economica, 34(135): 254-281.

Phillips, A.W. (1958) “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957,” Economica, 25(100): 283-299.

Samuelson, P.A. and R.M. Solow (1960) “Analytical Aspects of Anti-Inflation Policy,” American Economic Review, 50(2): 177-194.

Sandeep Mazumder in an Associate Professor of Economics at Wake Forest University. His recent research has focused on inflation dynamics in the United States.

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