The transformation of Friedman s views on the Phillips curve between 1967 and James Forder Balliol College Oxford. I.

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1 The transformation of Friedman s views on the Phillips curve between 1967 and 1976 James Forder Balliol College Oxford I. Background Forder (2014) seeks to rewrite the history of thinking about the relationship of inflation and unemployment in the post-war period up to about That date is chosen as (near enough) marking the arrival of monetarist counter-revolution in policymaking and also because it is just after some forceful and apparently persuasive statements of what, in that work, I call the Phillips curve myth. The myth is the story of the Phillips curve which it seems everyone has believed to the effect that (1) Phillips discovered a negative relationship of wage change and unemployment (2) it was quickly interpreted as implying the existence of a stable menu of policy choice between inflation and unemployment (3) this led to inflationary policy as policymakers preferred low unemployment even at the price of inflation (4) doubts about the feasibility of this policy were raised only when Phelps (1967) and Friedman (1968) innovatively pointed out that on-going inflation would change expectation and the Phillips curve so that the menu would disappear and inflation would have no long run effect on employment (5) the Phelps/Friedman view was hotly debated, but eventually triumphed. I call it a myth because, as the first five chapters of Forder (2014) argue, each of those claims is complete nonsense. They are all false, and not false on some pedantic detail, but false in being wildly at variance with the truth. Amongst the statements of the myth, or substantial parts of it, that I take to be important, and appear before 1979, there are, for example, Buchanan and Wagner (1977), Lucas and Sargent (1978), Dornbusch and Fischer (1978), and perhaps most influentially, Friedman (1977b) that one, as it happens, was very similar to an earlier publication from the Institute of Economic Affairs: Friedman (1975). It is obviously interesting that completely false statements of the history of the period appeared so soon after it and yet went as far as I know completely unchallenged (Unchallenged as history, that is). Later parts of Forder (2014) make some suggestions as to how that happened, but the point of particular concern in this paper 1

2 is to consider the expression of the myth particularly by Friedman, and what makes that interesting is that the story told in Friedman (1977b) or the 1975 version is not only all wrong, but also very much at variance with what he had said earlier, most importantly in Friedman (1968). II. Friedman 1977b a recap of what he says about the Phillips curve I specifically criticized a number of the historical claims about the Phillips curve made by Friedman (1975) and Friedman (1977b) in Forder (2010), but here is a recap of the sort of claims he was making. Understanding of the Phillips curve had been through two phases of which the first was the acceptance of a hypothesis associated with the name of A. W. Phillips (1958) that there is a stable negative relation between the level of unemployment and the rate of change of wages high levels of unemployment being accompanied by falling wages, low levels of unemployment by rising wages. (p. 454) And, he said This relation was widely interpreted as a causal relation that offered a stable trade-off to policymakers. So that, Economists then busied themselves with trying to extract the relation for different countries and periods, to eliminate the effect of extraneous disturbances, to clarify the relation between wage change and price change, and so on. In addition, they explored social gains and losses from inflation on the one hand and unemployment on the other Later, summing up, he claimed, The age-old confusion between absolute prices and relative prices gained a new lease on life. (p. 469) And, The hypothesis that there is a stable relation between the level of unemployment and the rate of inflation was adopted by the economics profession with alacrity. It filled a gap in Keynes s theoretical structure In addition, it seemed to provide a reliable tool for economic policy, 2

3 enabling the economist to inform the policymaker about the alternatives available to him. But he said that, as time went on, inflation rose, the inflation-unemployment relationship seemed to disappear or change, and Many attempts were made to patch up the hypothesis by allowing for special factors such as the strength of trade unions. But experience stubbornly refused to conform to the patched-up versions (p. 469) The picture of foolish mistakes, and a reigning error could hardly be clearer. And the work of Phillips, and the Phillips curve are very clearly at the centre of it. III. Friedman 1968 does not forecast the breakdown of the curve Actually, Friedman (1968) hardly mentions the curve. What he does say about it appears after he has presented his theoretical account to the effect that an attempt to target too low a level of unemployment will result in inflation, the adjustment of expectations, and a return of unemployment to the previous level (unless inflation is accelerated). Then he says You will recognize the close similarity between this statement and the celebrated Phillips Curve. (p. 8) It is poor syntax, but all that is said is that there is a similarity. That is a quite different thing from saying that any understanding of the Phillips curve was at the heart of policymaking. Nothing changes as the short discussion of the Phillips curve goes on. Friedman says that Phillips wrote for a world in which prices were presumed stable and that this was a defect. Then in a long footnote, he says that where there are reasonably stable inflation rates, the Phillips curve will shift accordingly and that this is why those who have studied them have found it helps to include price change as an explanatory variable in their regressions. As it is stated, there is nothing there to say that Friedman thought that any misunderstanding of the Phillips curve was motivating policy. There is nothing to say that any understanding of any kind is doing that. Nor, actually, is there anything to say that there was anything the matter with the policy of the time, nor even that there 3

4 was really anything wrong with the Phillips curve literature as it was developing. It may be hinted that those studying the curve did not really understand what they were doing, but what is said is that they have hit on a reasonable approach in that the inclusion of price change as a variable determining wage change captures the right idea. Experience shows that whenever I make a claim like that, the force of habitual or conventional understanding, or just a determination to defend anything that has been said often enough, leads to attempts to work round the objection. So here, must it not be that Friedman was saying that the Phillips curve was at the heart of policy, it was misunderstood, and it just happens that he did not make himself very clear? Well, one of the things I try to do in Forder (2014a) is attack the myth from so many different directions, that it becomes apparent that a willingness to accept a strained reading of the actual (rather than mythical) literature in one part is not only a strain there, but flies in the face of all the evidence elsewhere in the story as well. But for the purposes of this paper I shall stick to interpreting Friedman. First, he clearly describes what would happen if policy were inflationary. He would hardly do that if the point he was making was that it in fact was inflationary. He was not shy of criticizing policymakers, after all. Second, this view seems to accord with the impression created by the early responses to Friedman (1968) which sought to test the expectations argument. Solow (1968), Cagan (1968), Solow (1969), Lucas and Rapping (1969b), Lucas and Rapping (1969a), and Gordon (1970) are, I believe, the most notable, although it would be possible to question whether some are really inspired by Friedman. They are all concerned with testing the view that the adaptation of expectations to inflation will eliminate the tradeoff. Between them there is quite a bit of discussion of how to measure expectations, whether there might be non-linearities in the relation, and of econometric issues. They all mention Friedman as having put the view being tested but none of them seems to presume that his was a commentary on actual policy. They are, as it were, exploiting the variability in observed inflation, along with some treatment of expectations formation, to see whether it appears that the relationship between inflation and unemployment disappeared as expectations adjusted. They were not, on the other hand, apparently under the impression that they were testing 4

5 the viability of any particular policy. Another point would be that there is actual quantitative evidence available in that we can count Friedman s earlier discussions of the Phillips curve. I am ready to be corrected, but I know three none of them full publications of real research. They are Friedman (1966), Friedman (1967), and Friedman and Schwartz (1967). The point about there being three is that it does not make it seem he thought the curve terribly important. The point about the earliest of them being nearly a decade after Phillips wrote points in rather the same direction. Anyway, none of them said the curve was motivating inflationist policy the nearest they get is more or less like that of Friedman (1968). So are we to believe that the Phillips curve was at the heart of inflationist policy all through the 1960s; Friedman made rather an elliptical criticism of it for that reason only in 1968; it was, in fact, so elliptical that the immediate commentators did not notice that is what he was doing; and to cap it all, Friedman had never even mentioned the curve until 1966, and in four attempts, never clearly stated the point that a misunderstanding of it was the source of bad policy? If that is not enough, there is another consideration. That is that in publications shortly after 1968, Friedman s position is even more clearly not one that the Phillips curve was or had been motivating policy, nor that any mistake was routinely made about it. A fairly well-known piece is Friedman (1971/1974) the debate with his critics over the theory of monetary policy. The Phillips curve gets a mention there as well. But in this case, it is certainly an approving one. Friedman first presented a sixequation, seven-variable model which he said described the consensus, and said that differences between himself and others arise over how to determine the seventh variable. What he characterized as the Keynesian approach was to treat the price level as fixed. Keynes, he said, treated (for short run purposes) prices as an institutional datum (p.15), and later he said there was presumed to be A historical set of prices and an institutional structure that is assumed either to keep prices rigid or to determine changes in prices on the basis of bargaining power or some similar set of forces. Initially, the set of forces determines prices was treated as not being incorporated in any formal body of economic analysis. More recently, the developments symbolized by the Phillips curve 5

6 reflect attempts to bring the determination of prices back into the body of economy analysis. (p.32) If the Phillips curve were simply absent from the discussion, it would be possible to regard it as being an entirely theoretical account of various viewpoints. Once the Phillips curve is mentioned after 1968 it is hard to believe Friedman would have missed the opportunity to take a swipe at the Keynesians for believing it exploitable. Far from doing that, it is notable that what he actually says, although it has a recognizable Friedmanesque slant to it, there is also more merit in it that what is often said about the history of the Phillips curve. In particular, to say that prices were assumed rigid is not right, but as is argued in Forder (2013) and Forder (2014a chapter 1) to say that they were often treated as more or less exogenous to the level of employment would be about right. And if the question was asked as to what changed them, the realities of wage bargaining (including issues of bargaining power ) were at the forefront of the analysis. The 1960s then did see an econometricization of these theories (see Forder 2014a chapter 3 part 1), which were in retrospect described with the label Phillips curve. It is hard to find other synthesizing comments on the Phillips curve of the 1960s, even from as early as 1970 which capture those points as well as Friedman does in this piece, even if he adopts a bit of a dismissive tone. In any case, there is clearly no hint that an error about expectations is prevalent the Phillips curve is presented purely as progress over the previous approach (not as one step on the road to a proper, monetarist understanding). There is a case which is perhaps even clearer which arises from what is said in Friedman (1972). Like Friedman (1968) this was a lecture in this case to the American Philosophical Society. This lecture is something of a phenomenon. It is rather little known only 4 citations as compared to 1,321 for the 1968 lecture, (using the Thompson Reuters Web of Science ) yet it too discusses the early post-war consensus that monetary policy was unimportant, its gradual rehabilitation, the possibility that the pendulum may have swung too far (p.183), with too much being expected of monetary policy, and Friedman s argument that monetary policy cannot control the level of employment in the long run. It lacks the discussion of the natural rate of interest from Wicksell, that appears in the 1968 presentation, but that was a distraction in any case. The 1972 version has a far more sensitive treatment of 6

7 intellectual developments, and a far fuller deployment of evidence to make Freidman s case. Little noted though it is, in every way it is a better essay. The Phillips curve is discussed, and Friedman seems more comfortable simply applying that label to the relationship of inflation and unemployment than he was in the 1968 paper (common usage moved very much in that direction in the intervening years Forder (2014a ch 4)). Friedman said that there is a debate about whether the tradeoff is enduring, but none of those supposed to be holding that it was were actually named and again, there is no suggestion that policy was set on the basis of its stability. That issue is not addressed, but more importantly, by that in the lecture it was already clear that there was no room for the Phillips curve to be playing such a role. One of Friedman s primary objectives was to show the power of monetary policy as compared to fiscal policy and to that end there is a description of policy decisions in the 1960s, after the tax cut of He said, In 1965, as unemployment reached low levels, inflation started accelerating. In line with their economic doctrines, the new economists recommended a tax increase in early 1966, but President Johnson was unwilling to endorse such an unpopular measure. The Federal Reserve did, however, take restrictive monetary action. The quantity of money, which had been growing rapidly in 1965, was held roughly constant from April, 1966, to the end of the year. Despite a continued expansionary budget, monetary restraint checked the acceleration of inflation and produced the mini-recession of Alarmed by the consequences of its own policies, the Federal Reserve rapidly reversed course. Shortly thereafter, the economy again started expanding rapidly and inflation resumed its acceleration. Finally, the President recommended, and in mid 1968 the Congress approved, a substantial increase in taxes. Fearful of overkill, the Federal Reserve simultaneously increased the rate of monetary growth. Once again, the monetary effects were more potent than the fiscal. Economic expansion continued, and the rate of inflation increased still further. In early 1969 monetary growth was slowed and some nine months or so later there began a mild recession. (p.185) It is perhaps not a very good argument but the really striking things is that there is not the slightest hint of any of the actors concerned having a stable tradeoff in mind, or of 7

8 feeling that the acceptance of inflation was a reasonable option. Johnson is said to be affected by political considerations, but otherwise it seems everything was designed with the objective of smoothing the business cycle. Yet if the tradeoff is affecting policy at any time, it must be in these crucial years after the tax cut of 1964 and before Friedman (1968). In 1972, Friedman clearly did not believe that was what had happened. For the purposes of my argument, that is good enough, but it is surely the case that if in 1972 he did not believe 1960s policymaking had been based on an exploitable Phillips curve, then he did not believe it in 1968 either. So, quite apart from the fact that the 1968 paper does not say that the Phillips curve is motivating policy, and therefore cannot be said to predict its breakdown, it is also clear that Friedman did not believe that it was either. IV. The indexation issue So what led to the repositioning by Friedman between 1968 (or 1972) and 1975 or 1977? Lots of things, no doubt. Forder (2014a ch 7) considers how, mainly during the first half of the 1970s, thinking developed in ways that can reasonably be thought to have made the myth seem more plausible. There are such things as the way the debate between Friedman and his critics was conducted, including some very poor positioning by some of his opponents; a collection of minor historical mistakes which happen to have fed the larger one; and some points which I suppose are no more than matters of chance, such as that the most widely cited papers in the Phillips curve literature have aspects which are somewhat more suggestive of the myth than is the bulk of the literature, so that anyone reading just those might get the wrong idea particularly if primed by something like Friedman (1977). Those things, though, are principally explanations of how people who knew no better came to believe a myth. We know from the long footnote in Friedman (1968), and the sensible if brief summary in Friedman (1971/1974) that Friedman did know better. So what do we say about his change of position? Partly, I suppose we say, he thought he was on to a good thing, propounding his own foresight; partly, perhaps he thought he had something that could work as a knock-out blow against the Keynesians. In the case of the Nobel Lecture, there is perhaps also the point that he set himself to display scientific progress in economics and the Phillips curve myth seems to do that very conveniently. It does do that, although it is a funny thing to display the scientific 8

9 status of a discipline by saying things about it which are completely false. In any case, though, Friedman (1975) does not really have that aspect it is more purely a critique of the way policy was run, and a diagnosis of the error. So, I suggest there may be another part of the story. It is that in 1974 Friedman found himself in rather a tight spot, and had the unfamiliar experience of plainly losing an argument about inflation. The idea that a misunderstanding of the Phillips curve lay at the heart of inflationist policy rescued him from his tight spot, avoided the argument he was losing, and otherwise conformed to an crucial aspect of the strategy of his arguments in the early 1970s. First, though, here is what may seem to be a detour. In 1973 Friedman raised the idea that widespread use of indexation could contribute to bringing about the reduction of inflation. He pursued it with vigour, and gained a great deal of public attention in Then, I believe, he dropped it. The idea that indexation would reduce the costs of inflation was, of course, well understood. That point was made by Friedman (1973a) in Newsweek. The further step, of presenting it as contributing to an anti-inflationary policy was much more novel, but was first (?) put in Friedman s next column, Friedman (1973b). The earlier column discussed the inadequacy of available outlets for small savers in an inflationary environment and ended with the assertion of the need to develop more effective ones. The second column then discussed the benefits of indexation of various contracts but concentrated on the case for indexing income tax bands and creating government bonds that would repay in purchasing power terms. All that concerned the benefits in terms of reducing the costs of inflation, but here Freidman ended saying, The would reduce the harm done by inflation and would ease the withdrawal pains from reducing inflation. They would also lower the revenue that the government gets from inflation and hence the government s incentive to engage in inflation. This is at one and the same time a major argument in their behalf and the chief obstacle to their enactment In Friedman (1974d) he concentrated on indexation of income tax bands, noting the 9

10 advantages for equity and accountability of Congress for its actual tax-raising. Bu this column ended with the words, In addition, by reducing the revenue that the Federal government gets from inflation, it would lessen the incentive on the part of the government to inflate. This is the rare bill that simultaneously promotes equity, accountability and a sensible economic policy. I am suggesting, obviously, that the interesting thing about these columns is the idea that because of the source of inflation in particular incentives on governments, indexation contributes to achieving price stability. The case was made at greater length for an American audience in Friedman (1974c) an article in Fortune and for a British one in Friedman (1974b) a pamphlet of the Institute for Economic Affairs in the United Kingdom (which was an expanded version of the Fortune article). In Fortune, under the title Using escalators to help fight inflation he began by asserting The real obstacles to ending inflation are political, not economic (p. 94) because ending inflation would deprive governments of revenue and produce a temporary recession. Indexation would not itself reduce inflation but, be said, it would reduce the revenue that government acquires from inflation which means that government would have less incentive to inflate. More important, it would reduce the adverse side effects that effective measures to end inflation would have on output and employment (p. 94) He then makes the claim an important point in my argument that, From time immemorial, the major source of inflation has been the sovereign s attempt to acquire resources to wage war, to construct monuments or for other purposes. Inflation has been irresistibly attractive to sovereign s because it is a hidden tax that at first appears painless or even pleasant, and above all because it is a tax that can be imposed without specific legislation. He then expands upon that explaining how the creation of fiat money, fiscal drag, and 10

11 the reduction of the real value of government debt have this effect and concluded that ending inflation would eliminate these revenues and force the government to some other politically unattractive course. (A second consideration, which he said was more important, but from the point of view of the current paper is less interesting, is that the public lack the stamina for long periods of counter-inflationary policy, and that indexation would help by speeding its effects.) He then discussed the operation of indexation and various advantages in terms of allowing purchasing-power guaranteed savings, insurance policies and the like; the benefits of transparency of the tax system, and considered the kind of legislation that would be required to make it effective (answer: mainly tax changes). Amongst a variety of objections that he considered, one that gets an interesting treatment is the suggestion that state-sponsored adoption of escalation would indicate that the effort to reduce inflation had been given up and thereby tend to strengthen forces perpetuating it. To this, in Fortune Friedman said, If the public does not wish to stop inflation, but is content to have the government use inflation as a regular source of revenue, the sooner we adapt our institutions to that fact the better. (p. 176) It is not much of an answer on any basis, but it is particularly strange in an essay where it is being argued that the adaptation of institutions to inflation would greatly reduce the government s ability to raise revenue from it. Clearly, Friedman is not taking the objection seriously. It would be interesting to know whether that is also true of one he considers slightly later, which was that, as he put it inflation serves the critical social purpose of resolving incompatible demands by different groups (p. 176) by fooling these groups into believing they have acquired a greater share of national income than they have. To this he responded, If this view is correct on a wide enough scale to be important, I see no other ultimate outcome than either runaway inflation or an authoritarian society ruled by force. Perhaps it is only wishful thinking that makes me reluctant to 11

12 accept this vision of our fate. (p. 176) Again, that is not really a response at all, except that one is led to suppose Friedman means to reject the premise of the objection (He said the same thing in the IEA version of the argument). If not, something strange has happened, since he clearly has not thought very hard about what might be done, and yet, if that were really the problem, serious consideration of it would be of great importance. Friedman s advocacy of indexation was certainly a great media success there are dozens of references to it in the newspapers. I suppose that reflects the fact that indexation had previously been thought of as a way of living with inflation rather than fighting it, and consequently, to find one of the world s most notable sound money men advocating it was a surprise. This was much more attention than Friedman had one previously, and to judge by the tireless way in which he handled media attention, and responded to everything that came up, and indeed, carried on advocating indexation once it became apparent how much attention it was receiving, suggests that he rather enjoyed it all. There was one more significant presentation of it in Britain. It was at another IEA event where there was wide ranging discussion of the inflation problem and which was published as Robbins (1974), with Friedman s contribution being Friedman (1974a). It was a rather more technical presentation that the others, dealing with questions of implementation at much more length. Although he did, during the discussion, consider incomes policy (dismissing the case for it, as usual), he did not initially address cost-push inflation even to the extent of dismissing it in the way he had in earlier publications. No matter though, because it came up in a comment on his ideas Jay (1974a). Although often correctly described as sympathetic to monetarism, Jay also took the view that the British problem arose from the combination of aggressive trade unions and a political intolerance of unemployment. (For example, Jay (1973)). The consequence, for Jay, was doom. It is put even more pessimistically in Jay (1974b) which perhaps also makes clearer that the trend was for each bout of reflation to start at a higher level of inflation so that, in the end, the process was explosive. (The fullest 12

13 statement of his views may be Jay (1976), but the argument is clear in the earlier versions). The interesting thing, perhaps, is that in Jay (1974a) he clearly wanted to take on Friedman s views on the issue of cost-push inflation. As he characterized the debate there were two views which were compatible with monetarism. One was that if unions brought wage increases, there would be unemployment, and inflation would stabilize when unemployment was sufficiently high that this balanced the bargaining power of trade unions, making for equilibrium. The other group Friedman s, as Jay put it denied that unions ever had power to raise wages so that after an initial recession in which unemployment would rise there would be a reversion to a low rate of unemployment. Friedman made a comment on Jay s presentation which did not dispute his characterization of the issue. But he also suggested that one should think of universal indexation, and said that if unions could raise wages in those circumstances, it must mean that society had broken down. Here, then, he did revert to his dismissal of the argument. But Jay, naturally enough, (and with perfect consistency with his earlier and later arguments) said that this was his point society was breaking down. As of 1974 I suppose Jay s view seemed to have much more power in the UK than in the USA. For Friedman to dismiss the view that American democracy was threatened by the unions was perhaps automatic. But in Britain, there were plenty who took Jay s view, and many a retrospective treatment of the 1970s has regarded it as eminently reasonable that they should have done. The possibility that unions had and were using this power certainly damaged the case for indexation. It also raised the possibility of cost-push inflation, albeit in a basically monetarist world but even that was something Friedman had never admitted. Yet in debate with Jay, he had no answer. If society was breaking down in that way, indexation could be no help at all, but would merely help it on its way. V. The Phillips curve story as a response to this debate. Now, here are some little details about timing. The Fortune article was in July 1974, Monetary Correction is not dated more precisely than 1974, but it was reviewed by 13

14 Oppenheimer (1974) on 26 September. Friedman s discussion published in Robbins (1974) was presumably from shortly after July the likelihood of the earlier work having triggered the invitation to discuss the matter again, and Friedman s considering details more than he had in the earlier ones are the clues. But Robbins (1974) is a book (albeit a small one), and was published in 1974, so the meeting was presumably not late in the year, and probably not after the publication of Monetary Correction. Those points of timing matter because Friedman (1975) was derived from a presentation by Friedman to the IEA in September (That is apparent from the fact that the Economist of 21 September reported Friedman addressing a meeting there, and the focus of the article on the Phillips curve makes it obvious that it was the 1975 paper that was being presented, not a discussion of indexation). So the first appearance of the Phillips curve myth in Friedman s writing looks as if it comes straight after Jay wrecked his argument for indexation, at least in Britain. And that first appearance was, of course, in another presentation in Britain. With all this in mind, I would suggest there are some further little noticed points of interest in Friedman (1975) and Friedman (1977b). First, indexation as a response to inflation is absent. That, I think, should be seen in the light of the media attention the idea had received. It is really a rather strange thing to drop it so suddenly, after it had seemed for so long to be such a successful argument. Second, the idea motivating Friedman s proposal on indexation is replaced by an idea about the Phillips curve. In the indexation discussions, the political source of bad policy was a desire for revenue ( From time immemorial and all that). In the Phillips curve story, it is a desire for low unemployment. So the alleged motivation of governments changed as well. Whereas one might, perfectly reasonably say that if Friedman lost the argument to Jay, he ought to drop the indexation proposal, it is quite something else for him also to drop the political story which motivated it, and replace that with a very different one. And thirdly, one of the things about the Phillips curve story, as Friedman put it, was that it allowed him to keep quiet about the possibility of cost-push inflation. The Phillips curve was by 1975 something used to describe cost-push or demand-pull (the expression was used in many different ways, discussed in Forder (2014a) and Forder (2014b)). Indeed, a striking thing about the Nobel lecture is that for all its pretence of describing the development of thinking, it does not describe the development of thinking about monetary policy at all. That had certainly been done in Friedman 14

15 (1968) and, better, in Friedman (1972). But in the Nobel lecture, where the expression monetary policy appears nowhere in the text, the word monetary four times, and money three. The whole argument is cast in terms of the relationship of inflation to unemployment the Phillips curve and the relation of policy to understandings of it. The question of the economic causes of inflation is therefore more or less passed over; and consequently the challenge of the cost-push theory can be, and is, ignored. No doubt the 1975 version was well received at the IEA. There had been a great deal of discussion of the curve in close relation to British policymaking (rather more than in America, in fact). Although it had hardly been said to have motivated inflationist policy, it had been very much disparaged, including and particularly by some of those involved with the IEA, who I suppose would have heard or become quickly aware of Friedman s 1975 presentation. Many of them were at that time involved in an argument about British policy, and so I suppose the idea of bashing the Keynesians with an allegation of foolishness appealed to them as well. In any case, the signs are that the argument was well received by them. (The Nobel Prize version was actually reprinted by the IEA as Friedman (1977a) except that the title was varied from Inflation and unemployment to Inflation and unemployment the new dimension of politics. That, I think, shows that there was an instrumentalist, and political, reason for adopting the form of the argument as it was put by Friedman. And, I suppose that a hearty reception at the IEA might have led Friedman to think it a good line to take in the Nobel lecture too. VI. Conclusions So, from Friedman s point of view, the Phillips curve story was much more convenient than I think has been realised. It was particularly convenient in the British context in which it was first advanced, and enthusiasm for it there may have propelled Friedman further on the same course. It was convenient because it avoided an argument about cost-push inflation and because it allowed Friedman to carry on giving political explanations of inflation that explained why it was that policymakers had not acted on a perfectly simple so Friedman would say formula for controlling inflation. It so happened that it created an opportunity for Friedman by rather misrepresenting the foresight in Friedman (1968) to present himself in rather an 15

16 impressive light as well. But on the argument I am suggesting, that was just a bonus. And in one sense, the cause of Friedman s departure from the facts was the necessity of finding some way to respond to the insight and forcefulness of Jay s account of British inflation. References Buchanan, J. and R. Wagner (1977) Democracy in deficit: the political legacy of Lord Keynes. New York, Academic Press. Cagan, P. (1968) Theories of mild, continuing inflation: A critique and extension, in Inflation: Its causes, consequences, and control ed S. W. Rousseas Wilton, Connecticut, Calvin K Kazanjian Economics Foundation Dornbusch, R. and S. Fischer (1978) Macroeconomics. Tokyo, McGraw Hill. Forder, J. (2010) "Friedman's Nobel Lecture and the Phillips Curve Myth." Journal of the History of Economic Thought 32(3): Forder, J. (2013) Macroeconomics and the L-shaped aggregate supply curve, in Handbook of Post-Keynesian Economics, volume 2 ed G. C. Harcourt and P. Kriesler Oxford, OUP Forder, J (2014a) Macroeconomics and the Phillips curve myth. Oxford: OUP Forder, J. (2014b) "Eight views of the Phillips curve - seven authentic, one inauthentic." Presented at the History of Economics Society, Montreal, June 2014 Friedman, M. (1966) Comments, in Guidelines, informal controls, and the market place ed G. P. Schultz and R. Z. Aliber Chicago, Chicago University Press Friedman, M. (1967) "Must we choose between inflation and unemployment." Stanford Graduate School of Business Bulletin Friedman, M. (1968) "The role of monetary policy." American Economic Review 58: Friedman, M. (1971/1974) A theoretical framework for monetary analysis, in Milton Friedman's monetary framework ed R. J. Gordon Chicago, University of California 1-62 Friedman, M. (1972) "Monetary policy." Proceedings of the American philosophical society 116(3):

17 Friedman, M. (1973a) "Living with inflation." Newsweek, 8 October: 90. Friedman, M. (1973b) "More on living with inflation." Newsweek, 29 October: 96. Friedman, M. (1974a) Inflation, taxation, indexation, in Inflation: Causes, consequences, cures ed L. Robbins London, IEA Friedman, M. (1974b). Economist 28 September. Friedman, M. (1974c). Fortune, July. Friedman, M. (1974d) "Inflation-proofing the income tax." Newsweek, 13 May: 120. Friedman, M. (1975) Unemployment versus inflation? London, Institute of Economic Affairs. Friedman, M. (1977a) Inflation and unemployment: The new dimension of politics. London, IEA. Friedman, M. (1977b) "Nobel Lecture: Inflation and unemployment." Journal of Political Economy 85: Friedman, M. and A. J. Schwartz (1967) Staff reports on research under way, in Contributions to economic knowledge through research Gordon, R. J. (1970) "The recent acceleration of inflation and its lessons for the future." Brookings Papers on Economic Activity 1: Jay, P. (1973) The good old days of stop-go economics. The Times, 5 December: 18. Jay, P. (1974a) Do trade unions matter, in Inflation: Causes, consequences, cures ed L. Robbins London, IEA Jay, P. (1974b) How inflation threatens British democracy with its last chance before extinction. The Times, 1 July. London: 14. Jay, P. (1976) A general theory of inflation, unemployment, and politics. London, IEA. Lucas, R. E. and L. A. Rapping (1969a) "Real wages, employment, and inflation." Journal of Political Economy 77(5): Lucas, R. E. and L. A. Rapping (1969b) "Price expectations and the Phillips curve." American Economic Review 59(3): Lucas, R. E. and T. J. Sargent (1978) After Keynesian Macroeconomics, in After the Phillips curve: persistence of high inflation and high unemployment Boston, Federal Reserve Bank of Boston Oppenheimer, P. (1974) review of Friedman 'Monetary correction'. The Listener, 26 Spetmebr:

18 Phelps, E. S. (1967) "Phillips curves, expectations of inflation and optimal unemployment over time." Economica 34(135): Robbins, L., ed(1974) Inflation: Causes, consequences, cureslondon, IEA Solow, R. M. (1968) Recent controversy on the theory of inflation: An eclectic view, in Inflation: Its causes, consequences, and control ed S. W. Rousseas Wilton, Connecticut, Calvin K Kazanjian Economics Foundation Solow, R. M. (1969) Price expectations and the behaviour of the price level. Manchester, Manchester University Press. 18