“Everybody knows”: Phillips curve myth or reality in Norwegian macroeconomic policy and modelling
There is development in macroeconomics that everybody who have an interest in the field knows very well. It is that the Phillips curve was central for macroeconomic policy from the early 1960s until the 1980s. The curve’s trade-off between unemployment and inflation misled the (somewhat naïve) economists of the day to encourage policy makers to pursue inflationism. The role of expectations was not understood by economists before Phelps and Friedman revolutionized the field.
In his book from 2014, John Forder brings strong evidence showing that the curve of Phillips from 1957 was not original; That there was very little inflationism during the 1960s, and that the Phillips curve had in fact very little impact. Finally, the economists of the time were well aware of price expectations as well as of many other drivers of wage increases. At the end of the day, the standard Phillips curve story is much more of a myth than a truthful story about how the field developed in the course of a few post war decades.
This short piece in the Norwegian journal Samfunnsøkonomen, adds a few perpectives from our part of the woods. Through main-course theory, Norwegian economists should have been well vaccinated against the Phillips curve. Nevertheless, there may be traces of trade-off thinking in the policies of the mid 1970s. The historians may want to look closer at this than they have had done so far. A modernized (vertical) Phillips curve edged its way to the center of policy thinking at the start of the new millennium. But that development was rationalized by the international Phillips curve myth itself, and in this lies some of the real importance of the myth