Archive for June 13th, 2008
Most students of macroeconomics know the Phillips Curve — the inverse relationship between unemployment and inflation — but few know much about Alban William Phillips, the New Zealander who first identified the relationship. Though highly regarded in his time, arguably he didn’t achieve the recognition he deserved, according to Robert Leeson, a visiting professor at Stanford University. He says Milton Friedman used some of Phillips’ original insights to develop the role of inflation expectations and discredit the Phillips Curve. Furthermore, Phillips’ poor health, in part a result of the years he spent as a Japanese prisoner of war, hindered his ability to advance and defend his research; he died aged 60 in 1975.
Still, in contemporary central banks it isn’t Friedman’s monetarism but the Phillips Curve (to be sure refined with the insights of Friedman and others) that infuses views of the inflation process. “A model in the Phillips curve tradition remains at the core of how most academic researchers and policymakers–including [me] –think about fluctuations in inflation,” Federal Reserve Vice-Chairman Donald Kohn told a conference of the Boston Fed Wednesday. “Indeed, alternative frameworks seem to lack solid economic foundations and empirical support.”
In that sense the legacy of Phillips seems secure.
Mr. Leeson writes:
In 1952 Friedman asked Phillips how to model inflationary expectations and Phillips wrote for him the adaptive inflationary expectations formula that was later used to suggest that the Phillips curve had neglected inflationary expectations. Inflation is much more serious in Phillips’ theoretical model – the system becomes unstable. In Friedman’s model, the worst that happens is that you return to the natural rate [of unemployment]. Phillips was in a sense more of an opponent of inflation than Friedman.
Phillips spent 3 and a half years in Japanese POW camps — he was lucky to survive. There were a lot of physical consequences — he lost his sense of taste for example. He left the London School of Economics for Australian National University in Canberra in 1967 and had a stroke shortly afterwards (he was born in 1914). He lingered on in very poor shape until a second stroke killed him in 1975 (age 60).
The Phillips Machine (1950) made him locally famous; the theoretical Phillips curve (EJ June 1954) established him as an important macro optimal control theorist; his empirical illustration (1958) and Samuelson and Solow (1960) made him widely famous; Friedman (1968) added to his fame in an adverse way.
Throughout he just pressed an as best he could with ‘useful’ work — he didn’t engage his critics. I have speculated about this in the obituary I wrote (A.W.H. Phillips, M.B.E. (Military Division). Economic Journal 104.424, May, 1994: 605-1). But that speculation is just that — speculation.
I never really worked out how he felt about Friedman. Friedman tried to recruit Phillips to Chicago — twice. Both times, Phillips emphatically declined. That could have been for family reasons — his wife wanted to be closer to New Zealand (hence the move to Canberra).
Milton was very helpful to my research and volunteered the information about the 1952 meeting with Phillips at LSE. But Milton was also a polemical genius — he was so good at provoking his enemies. He was really taking on the Keynesiana — and the high inflation PC trade-off (which Phillips emphatically rejected) was a perfect whipping boy.
The Keynesian toleration of inflation increased until Solow pointed out (“The Intelligent Citizen’s Guide to Inflation” — Public Interest 1975), a 9% inflation rate doesn’t seem different from 10%. The “trade-off school”, Solow argued, had a reply to the “monetary school”: “Is there something qualitatively different about ‘double digit’ inflation? By any algebraic standards, of course, the difference between nine and 10 is no larger than the difference between eight and nine … There is no abyss, just potholes …
Inflation is their [the mixed capitalist economies] way of adapting to change. The unusually rapid rise in prices during the past year and a half may simply reflect the fact that the world has been called upon to absorb some unusually large changes. In that case, it will burn itself out”.
The following Presidential term (Carter 1977-81) wiped out over 40% of the dollar’s purchasing power. Inflation didn’t burn itself out, but the world view associated with Samuelson and Solow (Old Keynesianism) almost did.
The irony of all this is that the person Friedman regarded as his “surrogate father” Arthur Burns was Fed chair (1970-78) while inflation was getting out of hand and Keynesians were taking the blame!
Prior to the inflationary conflagration of the 1970s, Nixon instructed Burns to “err on the side of inflation. You see to it: no recession”. Burns responded that fiscal restraint was a prerequisite for a “serious fight against inflation”.
For this, Burns was regarded as having “ratted” on Nixon and a vendetta developed against him. Nixon instructed his legal counsel, Charles Colson, to leak to United Press International and the Wall Street Journal the false information that Burns was planning to increase his own salary whilst pressing for wage controls for everyone else. Sources also hinted that the Fed was going to be brought under White House control.
The Watergate alumni moved on from whiteanting the integrity of monetary policy to other morally corrosive activities, and to jail.
Colson found religion and pleaded with Burns for forgiveness; Burns obliged and the two of them fell to their knees and prayed.