Resident Senior Fellow, Vivek Dehejia writes in Mint on how Milton Friedman and Edmund Phelps defied a near-universal consensus in the academic and policy world based on theory, not data. Excerpts below:
"Last month marked the half-century of one of the most important academic articles written in macroeconomics in the post-war period. Economist Milton Friedman’s The Role Of Monetary Policy, published in March 1968, threw a stick of dynamite under the edifice of naive Keynesian economics. An article written the same year by economist Edmund Phelps constituted an additional surgical strike, and, taken together, the Friedman-Phelps fusillade would leave macroeconomics forever changed. Both economists would win well-deserved Nobel prizes, in part for their seminal 1968 work. Indeed, along with Robert Mundell, also a Nobel prize-winning economist, this trio comprises probably the greatest macroeconomists of the second half of the last century.
To understand their contribution, we need to turn the clock back to 1958. That was the year that a New Zealand-born statistician, A.W. Phillips, published a data-based paper showing a negative correlation between inflation in money wages and the unemployment rate for the UK. Soon after, other economists, including the Canadian-born Richard Lipsey, reconfirmed Phillips’ findings, and extended them to other countries. By this time, it was more usual to present the relationship as price inflation on the vertical axis and unemployment on the horizontal axis.
Finally, in 1960, economists Paul Samuelson and Robert Solow, themselves future Nobel laureates, named the relationship the “Phillips curve”, and, more importantly, provided a causal relationship in terms of the then prevailing Keynesian orthodoxy. To Samuelson and Solow, and a whole generation of Keynesian economists, the Phillips curve presented an apparent trade-off that policymakers could exploit: They had a menu of choices, with low inflation and high unemployment on one end and high inflation and low unemployment on the other, with all the points in between also available."
Read the full text here.
This article was republished on Stratfor here.