I think this quote makes it clear that the rational expectations revolution was based on fraudulent intellectual history. I don't think it shows that the fresh water and new Keynesian schools of macroeconomics have made no useful advances during my lifetime (that is since 1960). I'm sure they have made useful advances, although their claim to have improved on the thought of Samuelson and Solow is based entirely on critiquing the legend of one figure quoted out of context. It is the legend to their figure 2 which shows a stylized Phillips curve. The following paragraph basically explains what a graph is.
I quote the immediately following three paragraphs as published in May 1960 before I was born.
(update: emphasis mine)
Aside from the usual warning that these are simply our best guesses we must give another caution. All of our discussion has been phrased in short-run terms, dealing with what might happen in hte next few years. It would be wrong, though, to think that our Figure 2 menu that related obtainable price an unemployment behavior 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.
Thus, it is conceivable that after they ha produced a low-pressure economy, the believers in demand-pull might be disappointed in the short run; i.e., prices might continue to rise although unemployment was considerable. Nevertheless, it might be that the low-pressure demand would so act upon wage and other expectations as to shift the curve downward in the longer run -- so that over a decade, the economy ight enjoy higher employment with price stability than our present day estimate would indicate.
But also the opposite is conceivable. A low-pressure economy might build within itself over the years larger and nd larger amounts of structural unemployment (the reverseof what happene from 1941 to 1953 as a result of strong war and postwar demands). The result would be an upward shift of our menu of choice, with more and more unemployment being needed just to keep prices stable.
"Analytical Aspects of Anti-Inflation Policy" Paul H. Samuelson; Robert M. Solow American Economic Reivew Vol. 50, No. 2, Papers and Procedings of the Seventy-second Annual Meeting of the American Economic Association (May, 1960), 177-194.
I don't think that Milton Friedman had anything useful to add.
In 1960 Samuelson and Solow did not at all write what Friedman insinuated that they wrote. In fact, in 1960 they said the Phillips curve showed a short term but *not* a long term tradeoff. They explained that it would shift for two reasons. First, they predicted that it would shift up and down with expected inflation. In other words, Friedman is guilty not only of distorting the claims of Samuelson and Solow but of presenting their clearly stated prediction as his own. Not to put to fine a point on it, he plagiarized them when pretending to critique them. But wait, there's more.
In the next paragraph they went on to note that the Phillips curve will shift out as cyclical unemployment becomes structural. Samuelson's nephew (and OJ Blanchard) presented this insight as original 25 years later and called it "hysteresis". In standard watererd down for the public histories of macro thought it is fairly common to present the progression Samuelson and Solow claimed the Phillips curve was a stable long term tradeoff. Friedman and Phelps achieved a scientific revolution by noting that the Phillips curve depended on expected inflation. Further research suggests it is even more complicated that Friedman knew as the NAIRU can shift due to hysteresis (this is still so brand new that it hasn't been incorporated into standard macro models after an alleged 28 but actual 52 years). In fact, it is all there in Samuelson and Solow 1960.
update: typo corrected and a word bolded
9 comments:
Friedman and Phelps said a bit more than "the relationship might change over time".
They argued that people's **expectations would adapt** so that "menu" totally disappeared in the long-run.
I don't see anything about expectations in what you quoted. So how can you say that Friedman and Phelps added nothing?
Dear Student
I am puzzled to note that you are able to write correct English but are not able to read. I quote again from Samuelson and Solow 1960 "expectations". There are only two ways you could fail to see anything about expectations in the quoted passage. Either you chose not to read it or you are blind.
I did not at all claim that Solow and Samuelson 1960 was the same as Friedman's presidential address. As I clearly explained, the third paragraph is not at all like the presidential address. Yes indeed Friedman differed from Samuelson and Solow as he asserted that unemployment would be the same for any monetary policy once expectations adapted. He clearly disagreed with them, He was clearly wrong. Later data show not that the presidential address was the same as Samuelson and Solow 1960 but that it was a regression from an accurate cautious (and necessarily weak) claim about the economy to the confident assertion that something which had happened and would happen again couldn't happen.
I did not claim that macro theory regained the level of Samuelson and Solow 1960 when Friedman delivered his presidential address. I claimed that it returned to the level of 1960 in 1985 when Summers and Blanchard wrote "Hysteresis and the European Unemployment Problem."
I ask for information. Did you read the post ? Why do you write "I don't see anything about expectations in what you quoted. " when I the passage I quoted includes the word "expecations" ?
It is clear you are functionally literate. What happened ? What explains your astonishing error ?
This is much more interesting than your merely gross error of claiming that I said a passage which anticipates something written 25 yeears later is identical to a passage written fewer than 10 years later.
To be clear, I think that on the day he died, Friedman's thought had not reached the level of scientific validity of Samuelson and Solow 1960. I clearly said that their work then and his work later were different. The fact that the data contradict his claims was pounded in to me by uh the data (please note the footnote to Blanchard and Summers 1985 thanking Robert Waldmann among another for reseearch assistance).
lol oops
In principle, there are two separate questions, and one is logically prior to the other: first, is there an expectations term that shifts the Phillps curve? second, is the coefficient on that term equal to 1? I'm not familiar with the detailed intellectual history here, but I'm pretty sure that the critical question for Friedman and Phelps was the second rather than the first. So I presume the answer to the first was already fairly well established by the time the "accelerationist" debate came to prominence.
Now it happens that Phelps and Friedman were wrong. At least at very low inflation rates, we can now say with reasonable confidence that the long-run Phillips curve is downward-sloping. Nonetheless, there's something to be said for the idea that the vertical approximation was an advance over the vagueness that previously prevailed with respect to the long-run Philips curve.
I love Samuelson and Solow. Solow is the most careful writer I know. (Samuelson is not nearly as witty as he thinks, but I love him all the same)
You may want to take a look at "Fifty Years of the Phillips Curve" where Solow explains what was special about Friedman's presidential address.
Personally I have never spent enough time thinking about the differences between Samuelson-Solow, Friedman, Phelps, Lucas, etc., so it's nice to have the work cut out for me: thanks.
@Andy Harless I don's see how a precise and false statment is an advance. I think that our current knowledge on the topic is very well summarized in the three paragraphs which I quoted.
Friedman definitely suggested that if expectations adapt, then there is a natural rate of unemployment. This means that he snuck in the assumption of suggesting that there is no hysteresis convincing the profession that anyone who agreed with the second quoted paragraph must agree. That is he argued that the third paragraph was inconceivable when, in fact, it was published in the AEA papers and proceedings.
I think you presume incorrectly. In general, I see no point in typing your presumptions on the web. This is not an obscure topic in intellectual history. I assert that the absolutely and demonstrably false claim about Samuelson and Solow 1960 is central to the current consensus in mainstream macroeconomics. It may be that in 1968 it was still recognised that Samuelson and Solow did not make the error which they very specifically criticize in the quoted paragraphs. However, by 1982 that claim was absolutely central to the macroeconomic debate.
You are, I think, familiar with the suggestion that the Lucas critique had a role in the development of macroeconomics. It certainly did. The field was transformed by the idea that "What we do in a policy way during the next few years might cause it to shift in a definite way.". Now Lucas was honest enough to explicitly disclaim any originality in "Econometric Policy Evaluation: A Critique" but this plain statement has been forgotten too.
Oops I tried to quote Lucas from memory. In fact he asserted that there was "little" not zero originality in the paper. I now quote Lucas by cutting and pasting
"There is little
in this essay which is not implicit (and perlmps to more discerning readers, expli-
cit) in Friedman [ I 1 ], Muth [291 and, still earlier, in Knight [211. For that matter, the criticisms I shall raise against currently popular applications of econome-
tric theory have, for the most part, been anticipated by the major original contributors to that theory. 3"
Young Robert, I salute you. This is important stuff.
I spent quite a lot of time with this older post:
Did Samuelson and Solow claim that the Phillips Curve was a structural relationship?
Art
Robert, you changed my life. Thank you.
Answering an old question
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