Samuelson and Solow

Samuelson and Solow's (1960) paper on the Phillips curve in the U.S. has been widely derided. The paper noted that wage inflation and the unemployment rate tended to be negatively correlated in the US during the 1940s and 1950s. This meant there was a "tradeoff" between inflation and unemployment: low rates of inflation could be "bought" with high rates of unemployment, low rates of unemployment could be "bought" with high rates of inflation. As the story goes, this argument convinced policymakers that they could achieve permanently lower inflation with a modestly high but stable rate of inflation, which led to the policy mistakes giving us high inflation and high unemployment in the 1970s.

A fascinating paper by James Forder at Oxford U. puts the lie to the argument. Forder notes that it was only in the 1970s that economists began to claim that Samuelson and Solow interpreted their Phillips curve to mean that the tradeoff between inflation and unemployment was a stable one, i.e. one that could be exploited by policymakers to reduce the unemployment rate to 3 or 4 percent. Forder argues that throughout the 1960s the paper was taken to have a different message entirely: that the existence of the tradeoff meant that we could not easily achieve the twin objectives of full employment and price stability, and that the tradeoff was not stable and therefore not exploitable. So why the change in interpretation?

Forder dates the transition in interpretation to Milton Friedman's introduction of the expectations augmented Phillips curve in 1968. This is certainly right. Friedman and his followers needed a strawman against which to build their argument for the existence of a natural rate of unemployment. It was convenient to claim that Keynesians had argued for a stable tradeoff between inflation and unemployment, since then they could demonstrate that that claim was logically false because as we all know there is a unique equilibrium level of employment and unemployment, then show how belief in the permanent tradeoff contributed to the Great Inflation of the 1970s, then advocate for reform of monetary policy institutions to make sure this doesn't happen again.

But Keynesians shouldn't get too touchy about the monetarists' mischaracterization of Samuelson and Solow's views. This is, after all, exactly what Keynes himself did to the so-called "Classical" economists in The General Theory. He begins his book by defining Classical economics (which was not generally recognized at the time as a distinct school of thought, at least not in the way Keynes used the term) in fairly cartoonish terms, and then proceeds to demolish this theory. Keynes did the world a service - thanks to his work we gained an understanding of both Keynesian and non-Keynesian (Classical) macroeconomic theory, which had been a complete muddle before. And I suppose the monetarists did us the same favor with Samuelson and Solow.