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Saturday, May 10, 2014

Peter on Friedman, Phelps and Phillips

Pulled back from comments to this post.

Peter said...

Krugman just the other day:

"...Consider the somewhat similar debate in the 1970s over the “accelerationist” hypothesis on inflation — the claim by Friedman and Phelps that any sustained increase in inflation would cause the unemployment-inflation relationship to worsen, so that there was no long-run tradeoff. The emergence of stagflation appeared to vindicate that hypothesis — and the great majority of Keynesians accepted that conclusion, modifying their models accordingly."

So nobody claimed there wasn't [sic] a long-term trade-off and Friedman-Phelps made a straw man argument?

What explains the persistence of the myth?

OK the alleged myth is the claim that, before Friedman and Phelps, many prominent Keynesians believed that there was a stable long run expectations un-augmented Phillips curve. I think I will just call it "the alleged myth" to save space.

My honest opinion is that Friedman and Phelps made a straw man argument. The alleged myth, is extremely persistent. Peter accurately excerpts Krugman who clearly asserts the alleged myth as fact. This is an excellent example, because Krugman is not only very Keynesian but has clear sympathy for paleo Keynesians.

The obvious natural guess is that I am just wrong. However, the claim that the alleged myth is a myth is defended at great length by James Forder here, here and here.

I find his case to be rock solid and his arguments to be one hundred percent convincing.

Importantly, the alleged myth is very often stated as a well known fact, something everybody knows, and without the presentation of any evidence. This is true in the Wiki I edited and in the Krugman post to which Peter linked.

When the alleged myth is challenged, Krugman doesn't defend it.

Now, you can argue that the notion of a long-term usable unemployment-inflation tradeoff was never really part of Keynesian economics, that it’s a caricature of what 60s Keynesians actually believed. Nonetheless, the stagflation of the 70s was a decisive moment in economic ideology.

He doesn't claim that that which "you can argue" and which Forder does argue is incorrect. He expresses no opinion on the idea that Friedman obtained gigantic influence by knocking down a straw man. He just notes that whether the man knocked down was made of straw or not, he definitely obtained gigantic influence.

That post continues with

Stagflation seemed to confirm the Friedman-Phelps notion — based loosely on “microfoundations”, i.e., notions of rational behavior — that sustained inflation would get built into wage and price setting, so that historical correlations between unemployment and inflation would disappear. And this in turn gave a huge push to the anti-Keynesian revolution.

Put it this way: when I was in grad school, I remember lunchtime conversations that went something like this; “I just don’t buy the Lucas stuff — it’s not remotely realistic.” “But these people have been right so far, how can you be sure they aren’t right now?”

Now I think these conversations were with fellow graduate students not with the top Paleo Keynesians (Samuelson, Solow, and Tobin who was off in another city). In other words all that it shows is that, if it was a myth, the alleged myth had been accepted as truth by the students of the people who play the role of fools in the alleged myth.

Now specifically on Samuelson Solow 1960 (and specifically saying he disagrees with me) Krugman wrote

Via Brad DeLong, Robert Waldmann weighs in on the contributions or lack thereof of Milton Friedman, arguing that much of what he said was already there in Samuelson and Solow 1960. Actually, I’d give him more credit than that; the S-S paper — very unusually for both men, and for Bob Solow in particular — is one of those pieces sometimes described as “rich”, with many points alluded to but not many takeaway lines; to the extent that people did take something away, it was the crude notion of a usable downward-sloping Phillips curve, which turned out to be wrong.

Friedman — like Solow, in most of his work — was in the habit of writing crisp papers with very clear morals. So while you can,on a careful read, see from S-S why you should not in fact trust the Phillips curve to be stable, people didn’t actually get that until Friedman and Phelps laid out the point with stark clarity. Credit where credit is due.

So when discussing specific papers, Krugman says what Friedman and Phelps added was "stark clarity". Now if one makes a point which can be seen "on a careful read" with stark clarity and claim to have made a revolutionary advance, then one clearly has knocked down a straw man.

Note that Krugman says that "people" took away "the crude notion of a usable downward-sloping Phillips curve". Like the author of the Wiki, Krugman doesn't name any of those people or cite any document in which that crude notion was taken from Samuelson and Solow 1960. Forder claims to have looked and looked for such doccuments and found a white paper submitted to the Ontario Commission on Price Stability.

He may be wrong, but he is the only person involved in the discussion whom I have detected making an specific reference to any document published in the 1960s. Against him there is the alleged myth which everybody thinks he or she knows but which no one supports with any evidence except for the claim that it is what everybody knows.

I conclude that the alleged myth is a myth.

If so, why is it so persistent ?

1) I certainly confidently stated (to students in a lecture) that Samuelson and Solow believed in a stable expectations un-augmented Phillips curve. I hadn't read their paper (obviously I am literate). I didn't feel any sense of bluffing or pretending to know something I didn't know. I was sure this was true. Only later, did I begin to suspect that maybe their work had been unfairly characterized. After dawdling for months I googled Samuelson Solow Phillips curve. Now the second hit is a James Forder working paper which I find entirely convincing. After a few minutes of checking if the alleged myth might be a myth, I was convinced that it was. Then I was even more firmly convinced when I finally read Samuelson and Solow (1960).

A myth can persist if it is universally believed. If no one questions a claim, it can be accepted as true even if it doesn't withstand any scrutiny. I think that Forder is very lonely (now there are at least two of us).

2)It would be profoundly humiliating to the economics profession if "a decisive moment in economic ideology" was due to a successful rhetorical trick. I think Krugman went on to explain exactly how important the alleged myth was. The case of Samuelson and Solow mistakenly believing in a stable expectations un-augmented Phillips curve was central to the decision to start with theory and to a complete change in the methods used by economists. If this huge decision, which implied huge costs at least in effort, were due to a successful trick, then we must be a bunch of total fools. I think this is the problem. The main problem is that we are a bunch of total fools, but another terrible problem is that most economists are too proud to admit it.

3) Samuelson and Solow.

Samuelson was and Solow is an immensely respected economist. Any error by Samuelson becomes very famous. The thought that if Samuelson erred by looking at data and thinking without theory, then no ordinary economist should dare do that was very powerful. In particular, Samuelson is more responsible for the formalization of economics than anyone else (at least since Marshall). If he erred because of insufficient respect for mathematical economic theory, then very very much respect is required. My suspicion that they couldn't have written what I thought they wrote is based on the huge gap between the brilliance of work I had actually read and the stupidity of the alleged error. This is part of explanation 2 of persistence. Assuming that Samuelson and Solow said something stupid without checking, then checking and finding they said the opposite is profoundly humiliating. I was reluctant to check. I am sure I am not the only one.

But I think the key explanation for the persistence of the myth is that Samuelson and Solow didn't say that it was a myth (as far as I know and I now know that isn't necessarily very far). They hadn't forgotten what they wrote (that would be like forgetting how to ride a bicycle). They must have known that they were being mocked (I'm sure they weren't to their faces, but the mockery was in writing in many places). I don't understand their behavior.

But it makes persistence of the myth easy to understand. Friedman argued with a straw man. As far as I know, neither Samuelson nor Solow noted that they weren't that straw man. What's the chance of that ? I'm pretty sure it happened, but I still find it hard to believe.

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