In Economics, What Is the Phillips Curve?

It shows that there is an alternating relationship between unemployment and inflation. When the inflation rate is high, the unemployment rate is low; when the inflation rate is low, the unemployment rate is high.

Phillips curve

In 1958, Phillips was based on the British period from 1861 to 1913.

"Unemployment-wage" curve

The first Phillips curve shows that

The Phillips curve makes several important points:

The original Phillips curve focuses on

The above theory cannot explain to employers and workers

Overview of the Phillips Curve

Economics did not really enter an era of shining stars until the 20th century. in

Phillips curve

The number of economists that have emerged in less than a century is far greater than the total number of economists that have appeared in the past few centuries. Who wants to stand out in this fierce competition and become a famous economist must not only dedicate his life energy, but also have some extraordinary qualities. If you look at the growth experience of first-class economists, you will find that their success comes from the extraordinary insight into social phenomena, from the cultivating of economic skills, from the discovery of a new field with great development potential and patience. The hard work of pioneering work comes from hard work, from intuition, and of course, from opportunity. ^[5]

By chance, the story of a world-renowned economist was created. He was A William Phillips who was born in New Zealand. The Phillips curve named after him has been the focus and main line of the macroeconomics debate since World War II, but most of this contention does not belong to him. In his day, mainstream macroeconomics was surging and rushing forward. Phillips' academic career in economics was already quite short, but most of the time he was still far away from this river. Except for the Phillips curve, which is still mentioned all the time, he seems to have nothing left in economics.

Phillips curve personal life

A. William Phillips was born in New Zealand in 1914

William Phillips

Of a peasant family. At the age of 15, he was forced to work in an Australian gold mine because of his life. After finishing work at night, he taught himself electrical engineering in the dim light. He arrived in England in 1937, found a job at the London Electricity Authority, and joined the British Electrical Engineers Association. After the outbreak of World War II, he cast his pen to fight, fought on the Pacific battlefield, and spent a difficult time in the Japanese prisoner of war camp. It wasn't until the end of the war that Phillips, 32, took off his military uniform and studied sociology at the London School of Economics. At this time he was exposed to economics in the classroom and was deeply attracted to it. In fact, what really triggered Phillips' inspiration was the idea of treating national income as a circular flow and the economic system as a hydraulic machine in economics (there is such content in Samuelson's Economics) ). Based on this, Phillips designed a teaching model to explain Keynesian economics. He put colored water streams in plexiglass tubes, and used dynamic principles to make these colored water streams flow around and simulate the national income process. He produced and sold many of these models and sold them to research institutions and universities. The ingenious design also helped him find a teaching position at the London School of Economics.

Later, Phillips became interested in the relationship between stabilization policy and economic dynamics. In 1954 he published a "Stability Policy in a Closed Economy" in the Journal of Economics, which discussed the impact of lagging responses on macro-stability policies. Phillips has the kind of deep-rooted empiricism characteristic of engineers. He always felt that it was necessary to conduct quantitative analysis before doing theoretical reasoning, so he began to do research in this area. As a result, in 1958, Phillips published the famous "Relationship between the Unemployment Rate and the Change in Currency Wages in Britain 1861-1957" in the Journal of Economics. First proposed in the article. Phillips used British wage statistics for nearly 100 years to discuss the relationship between wage variability and unemployment. Phillips found that: 1. The rate of change in nominal wages is a decreasing function of the unemployment rate; 2. Even when the rate of growth of nominal wages is at the lowest normal level, the unemployment rate is still positive (Philips statistics are about 2% -3 %).

Phillips Curve became famous overnight

Phillips' original motivation for writing this article was probably to counter criticism of his doctoral dissertation. When the research results came out, he did not seek further theoretical explanations. The earliest theoretical explanation of the Phillips curve was his colleague Richard Lipsey. Lipsey believes that the unemployment rate is negatively related to the degree of excessive demand in the labor market (the more demand for labor, the more employment opportunities, the lower the unemployment rate), the degree of excessive demand in the labor market, and nominal wages. The rise rate is positively correlated, so it can be concluded that the unemployment rate and the rise in nominal wages are also negatively correlated. Lipsey explained the Phillips curve strictly from the perspective of the micro labor market. From this point, perhaps he is the most true of many scholars who promote the Phillips curve.

But what really made the Phillips curve famous overnight was the analysis of anti-inflation policy published by Samuelson and Solo in the American Economic Review in 1960. In fact, the name "Phillips Curve" was given by Samuelson and Solow in this discussion. The two economists replaced the British data with the data from the United States and replaced the nominal wage growth rate with the rate of price rise, and concluded the short-term relationship between inflation and unemployment. With the Phillips curve, neoclassical synthesis can easily formulate a prescription for macroeconomic policies: If you want to reduce the unemployment rate, you may wish to increase the inflation rate. In order to manage inflation, it is inevitable to make sacrifices in unemployment. (But in fact, Keynesian demand policies often put the goal of full employment ahead of the goal of reducing inflation.) With the weight of these two masters, the Phillips curve has since been embroidered with the banner of neoclassical synthesis. , Written into the charter of neoclassical synthesis.

Phillips curve rages

It is precisely because the Phillips curve is in an important position in the theory system of the neoclassical synthesis school, but by contrast it lacks the most theoretical support. Therefore, the opponents of the neoclassical synthesis school must first spare no effort to attack the Phillips curve. . One of the most influential was Milton Friedman. Friedman's speech when he won the Nobel Prize in Economics in 1976 was about the evolution of the Phillips curve. ^[6]

He believes: First, rational workers will determine their labor supply based on real wages rather than nominal wages. So the Phillips curve to discuss the relationship between the unemployment rate and the rate of change in nominal wages is purely misleading.

Second, the substitution relationship between inflation and unemployment advertised by the Phillips curve only exists in the short term. Because the cost of information about the general price level in the short term is too high, workers will have a temporary "money illusion" and mistakenly raise the nominal wage as an increase in real wages and increase the supply of labor, and the employer will be complacent about what he produces The price of that product rises, thereby increasing the number of workers employed. I don't know at this time the entire price level is rising. In the long run, both workers and employers adjust their expectations so that the expected inflation rate is equal to the actual inflation rate. At this time, the Phillips curve with a negative slope no longer exists, and some are just a vertical Phillips curve. This means that the unemployment rate is completely unaffected by inflation policy, which Friedman calls a "natural unemployment rate."

Third, Friedman asserted that the Keynesian demand policy in exchange for inflation for increased employment is like stopping the boiling water, which can only be temporarily effective each time, and wants to increase employment in the next round, unless a higher inflation rate is used . Friedman's attack on the Phillips curve was somewhat polite, because he still admitted that a negative Phillips curve exists at least in the short term. Some neo-conservative economists who followed him spared no effort in attacking the Phillips curve. Lukas and others who advocate "rational expectations" simply think that the Phillips curve is also vertical in the short term. In other words, the Keynesian demand policy has been expected by the public. This old-fashioned trick audience already knows the details, and then goes Who deceived the show? JM Buchanan, who is committed to creating the public choice school, believes that behind the Phillips curve is the indulgence of popular desire for political power expansion in the so-called democratic process, and the coax of political power expansion against popular desire expansion. Come back, comedy will become farce, even tragedy. Facts have shown that in the 1960s and 1970s, as the inflation rate rose, the unemployment rate rose without falling, and the Phillips curve changed from a negative slope to a positive slope!

Take a look at these hot debaters on the debate table: Neoclassical synthesis, represented by Samuelson and Solow, dominated the macroeconomics community in the 1960s. Friedman frequently attacked in the 1970s, almost alone to challenge the neoclassical comprehensive school, and set up a camp of monetarism. Lucas's theory of rational expectations is considered to be macroeconomics in the 1980s. Buchanan's theory of public choice is unique in the entire modern economics kingdom, and it follows from the cloud. These are all winners of the Nobel Prize in Economics: Samuelson won in 1970, Solow won in 1987, Friedman won in 1976, Lucas won in 1995, and Buchanan won in 1986. Together with several top masters like this, a "Century War" is indispensable. This battle is very similar to the Huashan sword in martial arts novels. There are more and more people participating in the discussion, and the debate around the Phillips curve is getting more and more fierce, but Phillips himself retired silently.

This peasant child from a small remote country in the southern hemisphere is more or less psychologically incompatible with the pretentious American theorists. The knowledge of electrical engineering that he taught himself in the shed of the Queensland gold mine in his early years may be much deeper than the economics education he received in the London school. Since the 1950s, Phillips' main interest has been in the so-called "optimal control theory". It is widely acknowledged that he was one of the earliest scholars to introduce the technology of optimal control and control engineering into econometric analysis. From a certain perspective, Phillips is still dreaming of that colorful stream. As an engineer, he is characterized by good construction and lack of speculation. He likes to treat the economy and society as a system that can be operated, and has been pondering how to operate more easily. But taking this thinking to do economics is definitely a dangerous path and a astray. Hayek has repeatedly reminded economists to be vigilant about this kind of engineer-like fantasy. In his words, the economist who ran into this path "if it is not a waste, it is a specific dangerous person." (Like Phillips, Hayek also taught at the London School of Economics, but when he left, Phillips had not yet entered the school.) Sure enough, from the 1960s, economists cared about the issues that Phillips cared about. Gradually lost interest.

Phillips curve career turn

In 1967, Phillips left the United Kingdom and returned to Australia, after a long absence. He started as a professor of economics at the Australian National University and set himself a new direction in research-he intends to study the Chinese economy. After his active efforts, a contemporary Chinese research center was also established in this university. In fact, Phillips' interest in China germinated as early as the 1930s. He had also learned Chinese when he was a prisoner of war in Java. Later, people have been wondering why old economists made such a major career turn in their twilight years. Perhaps as Lancaster said, this shows that he admits that he no longer has the ability to solve the problem he proposed to estimate the relationship needed for dynamic control, but maybe the old economist has already foreseen the rise of China's economy in advance. Rumble of thunder? Perhaps the answer is only known to Professor Phillips himself. Unfortunately, only a few years later, he left the world in his native New Zealand, leaving his legendary life and the gloom and hope of his last years.