Sunday, September 27, 2015

Krugman Admits the Phillips Curve Has Been a Bomb

Krugman writes at his blog:
One thing I do try is to concede that one piece of the conventional story hasn’t worked that well, namely the Phillips curve, where the “clockwise spirals” of previous protracted large output gaps haven’t materialized.

There is nothing to "materialize," Paul. Austrians have understood this for a very long time/

Murray Rothbard taught us the truth about the Phillips Curve decades ago and Joesph Salerno wrote in 1991:
Keynesian economists posited a stable “Phillips-curve tradeoff ” or
inverse relationship between inflation and unemployment.
Keynesians then advised that policymakers choose from this
“menu of policy choices” the attainable combination of unemployment
and inflation rates which would “optimize” society’s welfare.
During the 1970s and 1980s, however, it became painfully obvious
that the Phillips relationship was not stable, as inflation and unemployment
rates spiralled upward in tandem...

[There is no]room in modern Austrian monetary theory for the
neo-Keynesian postulate of a Phillips curve trade-off between inflation
and unemployment. Such a trade-off can only be alleged if one ignores
the price-coordinating feature of the social appraisement process by
which resource prices are derived from and adapted to entrepreneurial
forecasts of future output prices.


  1. So you concede that there is no inflation while the economy is at full employment? Krugman's point is that unemployment and inflation have both fallen since 2011.

    1. It isn't that there is no price inflation. It is just that it hasn't been increasing. And I have been pointing out for a long time that we are in a boom phase with unemployment falling.

  2. Inflation is defined as a persistent increase in the general level of prices. It is always caused by an increase in the quantity of money, which with a fiat currency can only be caused by govt. There is no relationship between inflation and unemployment.
    Reported unemployment and reported inflation can fall because the bureaucrats can redefine both.

  3. @PH Not sure about that "definition" of inflation. in fact, the very Keynesian idea of a "general level of prices" is fallacious,at best.

    That being said, I believe you are talking about the purchasing power of money.

    Unfortunately, the idea that the purchasing power of money is related only to the quantity of money is equally false. Mises described the "Money Relation" that shows how the purchasing power of money is related to the demand for money.

    I think Rothbard's Mystery of Banking is an excellent and fairly complete discussion regarding these issues.

    Good luck n your studies :)

  4. If I understand this correctly, what Salerno is stating is that the effect of inflation on basic resources prices keeps businesses from expanding even though the selling price of their products are increasing? Seems an extremely round-about way to just describe the simple effects of inflation...

  5. Helpful: "The curve was an empirical relationship that the economist William Phillips found in 1958. Phillips noted that movements in wages and unemployment were negatively correlated in the UK between 1913 and 1948. The neo-Keynesians then picked up on this and argued that there would be a negative relationship between unemployment and inflation." —