I believe it has, but it keeps coming up. Today, in class, we learned that the stagflation of the 1970’s did NOT refute the Phillips Curve, but in fact supported it. The “reasoning” was that the curve shifted rightwards just like any change in demand would appear to move out. So either unemployment or inflation was not high relative to the new curve- this part was not clarified.
This doesn’t seem right -like changing rules in the middle of the game- as this event was what discredited the curve, no? In addition, Greenspan noted in testimony the several times that there was both low unemployment and low inflation, but I can see the other side noting this as an example of when the curve shifted leftwards.
As I understand it, the Phillips Curve is an emperical observation- not a theoretical observation (even on theoretical grounds it runs into trouble- If every worker were to go to their employer tomorrow and ask for a raise, would employment increase or decrease? The Phillips Curve says it will increase!). So, if I have this right, just ONE occurance that is contrary to the Curve would falsify it, no? What gives?
The philips curve is a praxeological fact, although of course this is not how it is justified.
Inflation, before the market has time to react increases the money supply without a corrusponding increase in prices. This means that real costs have fallen for some and remained the same for others. This is precisely because of the non-neutrality of money and the fact that prices do not adjust to the new demand instantly. This means that the cost of all inputs falls in real terms, including real wages, which in turn means that they will be further employed.
The phillips curve is dependent upon certain things:
That there are no other significant changes in market conditions
That inflation is not entirely expected (if it were then it would really mess up the whole system and could actually cause the philips curve to run in reverse)
That wages are not ultra sensative (which once more can actually reverse the whole thing)
Mises admitted that the philips curve was the case, he simply used different terminology.
I’ve heard that it exists in the short term, but not in the long term. Meaning, more money is created and spent on goods which tricks producers into thinking that their goods are in higher demand than otherwise which incentivizes them to hire more workers, but once the inflation stops these unsustainable activites collapse just like would happen in any other artificial boom.
I’m curious as to where Mises accepts the Phillips Curve in these other terms?
From “Planned Chaos” (I actually first saw this in wikiquote but he also discusses it very briefly in Human Action)
“Government spending cannot create additional jobs. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other. If government spending is financed by borrowing from the commercial banks, it means credit expansion and inflation. If in the course of such an inflation the rise in commodity prices exceeds the rise in nominal wage rates, unemployment will drop. But what makes unemployment shrink is precisely the fact that real wage rates are falling.”
The key here is, of course, that real wage rates fall. There are no more resources in society than when the inflation began so one cannot pay employees the same amount which one was doing before, but one can, of course, afford to hire more people at a LOWER cost. This is exactly what happens, it is a money illusion driven by inflation and people’s lack of expectations.
The phillips curve cannot, of course, last in the long term, this is true of its very nature. If this were the case then unemployment should have permanently reached 1% by 1950 (nothing can totally eradicate frictional unemployment). If there are no further incramental increases in the money supply then fairly shortly after the inflation has ceased the value of money is bid back up and prices reach a new equilibrium, employment reaches its new equilibrium level and unemployment rises relatively from what it would have been had the same real conditions prevailed at the zenith of the inflation. At the same time real wage rates increase by the same standard.
At first I wanted to say there would be no real boom, but I want to back off on this judgement. Just know that I don’t think that it would be a very big one, but there would almost certainly be a bubble created. If you want I can probably flesh out the details of why this would be.
That part, the short term, makes sense to me. If consumers spend more on a good, then producers will invest more into the production of that good which will mean more jobs. And once the inflation stops, the unprofitable investments -which seemed sensible at the time they were made- will be seen as mistakes and will be liquidated (cause unemployment for labor). I’d imagine that Phillips, when formulating the curve took empirical “snapshots” of these instances without investigating the theoretical causes of them.
So, it seems that Austrians can cite the Phillips Curve as a bolstering of the ABCT. Unfortunately, it seems that Keynesians use this curve to justify more government spending.
If both high unemployment and high inflation have occurred at the same time, as well as low unemployment and low inflation, why should we still belive in the Phillips Curve?
I don’t know that much about the topic, but please correct if I am wrong.
“If both high unemployment and high inflation have occurred at the same time, as well as low unemployment and low inflation, why should we still belive in the Phillips Curve?”
If someone exercises every day and lives a very healthy life but then dies of cancer then would you argue that being healthy doesn’t increase your life span?
If a car tries to move forward very quickly but there’s something in the way which makes it move slowly then would you argue that pressing the acceleration peddle doesn’t make a car move fast?
Simply because high unemployment and high inflation have existed side by side means nothing, the point is RELATIVE unemployment and RELATIVE inflation. Unemployment would have been higher had inflation been lower. Of course, this is all assuming that the inflation is not so high that it causes much monetary instability, that’s a whole other can of worms.
There’s no reason at all that high inflation and high unemployment would in any way disprove the phillips curve. The phillips curve gives you the inflation rate as a function of expected inflation and the output gap (ie, actual unemployment rate minus the natural rate of unemployment). As such, this only tells you the set of possible inflation/unemployment pairs for a given natural rate of unemployment - ie, for a given supply curve - (also for a given expectation of inflation). So it’s the effect on output and inflation of changes in demand only! If there’s a shock to supply on the other hand, unemployment increases and inflation also increases (just look at basic AD/AS). You do that in introductory macro with shocks to expectations or supply as shifting the phillips curve. Now if stagflation were a demand side phenomenon, then it’d be strong evidence against the phillips curve. If it’s a supply side phenomenon, it’s perfectly consistent with the phillips curve. What caused the staflation of the 70s? Oil shocks!