I am not sure whether I am being told that I am right or I am being told that I am wrong.

In point 1, I take it 1966 is mentioned because that was the year of Friedman first criticising the Phillips curve on the basis that attempts to exploit it would change expectations. I am not sure that is really the interesting thing about Friedman's piece, but neither there nor in the better known Friedman 1968 does he use any formula - be it from Phillips, or 1952, or whatever. A mathematical treatment comes with Phelps, or in the empirical literature with Solow 1968, but it is not being said that Phillips told them his formula, is it? So I see no route by which whatever it was Phillips said in 1952 had a profound or any influence on the development of the literature. But in any case, I take it I am right to say that what Robert meant to claim when he said that Friedman 'leant about adaptive inflationary expectations from Phillips' was merely that Phillips suggested an equation - ?

No 2 is no doubt very interesting, but what exactly is the point? Phillips thought that expectations, if they operate in a certain way, could be destabilising? Well, yes. But Keynes thought that. Phillips incorporated the thought in a mathematically sophisticated model? Yes, certainly. All credit to him for the mathematical sophistication, but what point is being made in relation to the preceding discussion?

In relation to 3, I would suggest my paper in the European J History of Economic Thought 2010 vol 17(3) p493-511. One point it makes which is relevant to this discussion is that that the expectations argument commonly attributed to Friedman and Phelps originates and is commonplace long before they made it. So neither they (nor Phillips!!) was bringing an innovation to thought with that argument.

On Routh (point 4), I don't think that article has any relevance to what I was saying. I was only pointing out an earlier usage of the expression 'Phillips curve' than Robert had noticed. I thought he might just say 'Thank you'. Still, that's life. 

The position with Friedman is perhaps now the most puzzling. We started with Robert's clam that 

> Friedman (1953,
> 200) argued that removing the fixed exchange rate
> constraint allowed each country to pick a point on
> a ‘Phillips curve’ “according to its own lights … flexible
> exchange rates are a means of combining interdependence
> among countries through trade with a maximum of internal
> monetary independence”.


now we have merely that (1) fixed exchange rates constrain policy in certain ways that flexible ones do not, and (2) there was an argument about flexible exchange rates at the MPS with - I think - an implication that some thought and some denied that they were part of the story of the generation of inflation. Neither of those things relates either to the quoted claim about Friedman, nor to my first response. (Nor do they answer Alan Isaac's question).

Friedman's is a long essay and one where he is obviously trying to consider as many as possible of the angles on the issue. I therefore do not find it surprising that there are points at which he could we be read as accepting that inflation will happen, and perhaps even that it ought to be allowed. For those who want to translate as much as possible of the history of our subject into the *language* of 'the Phillips curve', then these provide some scraps of material. Those scraps would not include the remarks on page 200 which are as I previously noted, about monetary stability; but there are some less weighty points elsewhere in the essay. Nor is there any part of the essay where Friedman suggests that anyone could reasonable feel that a persistent inflation would bring any benefit. It is merely that he could be read as suggesting that there are certain circumstances where for a period prices might rise, and in some of those, output might well be above a sustainable level, and so unemployment low, and that all things considered that might not be a disaster. Yes, of course, that could be true. I don't know why anyone would think Friedman would have doubted it. There is also probably a suggestion that if some countries are going to be so foolish as to permit ongoing inflation, others would be better off with flexible exchange rates so as not to be faced with the alternatives of current surpluses or themselves allowing inflation. (That point of course ties the essay to the policy view West Germany took about 20 years later in abandoning their parity to avoid 'imported inflation' cf Emminger 'The DM in the Conflict Between Internal and External Equilibrium 1948-75' Princeton Essays in International Finance No 122).

If either of those is the insight to be conveyed by saying that Friedman wrote about picking points on Phillips curves, then so be it. My suggestion would be that the use of that terminology in that way, particularly when left in rather bald terms, introduces no insight at all, but creates lots of scope for confusion.

On that theme, I would suggest that the over-use of the terminology of 'the Phillips curve' generally has produced a great deal of confusion - rather more than has been recognised even by those who have published work on that question (although some of them make perfectly valid points, of course). In the economics of the 1960s and 1970s, 'the Phillips curve' meant all manner of different things. Sorting those out is one problem, but applying the expression even more widely in retrospect is no way to go on at all. 

May I advertise that I shall be addressing some aspects of the various meanings of 'Phillips curve' in the 1960s and 1970s, and the resulting confusion in a paper at Montreal in June?

James Forder
[log in to unmask]


On 14 Apr 2014, at 03:31, Robert Leeson <[log in to unmask]> wrote:

> 1. Phillips' 1952 formula for modelling adaptive inflationary expectations had an extremely profound influence - in 1966, it launched the influential phase of the monetarist counter-revolution (the rise of the natural rate of unemployment model and the demise of Keynesianism).
> 
> 2. Phillips (1953; 1954) demonstrated how flexible prices could generate a dynamically unstable system. 
> 
> The expectation that inflation would *not* continue would stabilise the macro-system.
> 
> The expectation of ongoing inflation would destabilise the system: "when price expectations operate in this way, therefore, the system ... becomes unstable".      
> 
> 3. For the history of expectations see Darity, W.J., Leeson, R and Young, W. 2004. *Economics, Economists and Expectations: From Microfoundations to Macroapplications*. Routledge: London.
> 
> 4. Routh's article is discussed in Leeson, R. 1998. Early Doubts about the Phillips Curve Trade-Off. Journal of the History of Economic Thought March, 20.1: 83-102. 
> 
> 5. Fixed exchange rates restrain the ability of policy makers to use aggregate demand manipulation to target anything other than fixed rates (they also led to the demand for price and wage controls).  A "maximum of internal monetary independence” implies that policy-makers could break free of this restraint. 
> 
> This was one of the fault-lines of the Mont Pelerin Society. When Machlup and Haberler converted to flexible exchange rates, Mises ostracised them. Hayek blamed MPS Chicagoans for the 1970s inflation; with some justification, Friedman blamed a second year MPS member (and his surrogate father), Arthur Burns, chair of the Federal Reserve (1970-78).
> 
> For reasons that require an explanation, professional economists continue to blame Phillips and Keynes.
> 
> RL
> 
> Leeson, R. 1999. Keynes and the Keynesian Phillips Curve. History of Political Economy 31.3, Fall: 494-509. 
> 
> ----- Original Message -----
> From: "James Forder" <[log in to unmask]>
> To: [log in to unmask]
> Sent: Sunday, 13 April, 2014 9:07:08 AM
> Subject: Re: [SHOE] Critiques of Keynesian Economics and the Stimulus
> 
> 1. Friedman p200 says that flexible exchange rates are 'a means of permitting each country to seek for monetary stability according to its own lights'. It is 'monetary stability', not any point on any tradeoff function that is under discussion there. That this must more or less mean price stability is apparent from the fact that later in the paragraph he says 'If all countries succeeded, the result would be a system of reasonably stable exchange rates...' That would clearly not be the case if they were choosing different points on Phillips curves.
> 
> 2. Guy Routh, in Economica 1959 vol 26 issue 104, p304 uses the expression 'Phillips curve'. 
> 
> 3. I think 'learnt about adaptive inflationary expectations from Phillips' means merely that Phillips may have suggested a particular formula for modelling expectations, rather than anything more profound. The idea that expectations of the future would change according to recent experience was hardly new to Friedman (or anyone else) in 1952.
> 
> James Forder
> 
> On 11 Apr 2014, at 21:34, Robert Leeson <[log in to unmask]> wrote:
> 
>> In the 'Case for Flexible Exchange Rates', Friedman (1953, 200) argued that removing the fixed exchange rate constraint allowed each country to pick a point on a ‘Phillips curve’ “according to its own lights … flexible exchange rates are a means of combining interdependence among countries through trade with a maximum of internal monetary independence”. 
>> 
>> The first draft was written in 1950. 
>> 
>> The 'Phillips curve' has a long history going back at least to the eighteenth century (Samuelson and Solow (1960) appear to have been the first to use the term in print). 
>> 
>> In 1952, Friedman visited the LSE and learnt about adaptive inflationary expectations from Phillips (he subsequently issued a mea culpa with respect his failure to acknowledge Phillips - as did Phillip Cagan). In 1952, Phillips was extending his Phillips Machine into the theoretical Phillips curve (1953). 
>> 
>> Friedman tried twice to recruit Phillips to the Department of Economics at the University of Chicago.         
>> 
>> RL
>> 
>> Leeson, R. 1994. A.W.H. Phillips, M.B.E. (Military Division). Economic Journal 104.424, May: 605-618. 
>> 
>> Leeson, R. 1994. A.W.H. Phillips, Inflationary Expectations and the Operating Characteristics of the Macroeconomy. Economic Journal 104.427, November: 1420-1421. 
>> 
>> Leeson, R. 1997. The Trade Off Interpretation of Phillips' Dynamic Stabilisation Exercise. Economica February, 64.253: 155-173. 
>> 
>> Leeson, R. 1997. The Political Economy of the Inflation Unemployment Trade-Off. History of Political Economy Spring, 29.1: 117-156. 
>> 
>> Cagan, P. 2000. Phillips' Adaptive Inflationary Expectations Formula. In Leeson, R. 2000.  A.W.H. Phillips: Collected Works in Contemporary Perspective. Ed. Cambridge: Cambridge University Press. 
>> 
>> 
>> 
>> ----- Original Message -----
>> From: "Alan G Isaac" <[log in to unmask]>
>> To: [log in to unmask]
>> Sent: Friday, 11 April, 2014 8:44:21 PM
>> Subject: Re: [SHOE] Critiques of Keynesian Economics and the Stimulus
>> 
>> On 4/10/2014 11:38 PM, Robert Leeson wrote:
>>> Friedman argued that flexible exchange rates would allow
>>> each country to use demand management to pick its own
>>> policy-determined point on its Phillips curve.
>> 
>> 
>> Was reference to the PHillips curve explicit?
>> If so, can you provide a cite?
>> 
>> Thank you,
>> Alan Isaac