Saturday, May 14, 2011

The Phillips Curve is Wrong, Stupid, and Bogus

What you see here is a famous image among economists. Keynesians applaud and laud it, Austrians abhor and loathe it. Simply stated, it is the theoretical argument that with more inflation in an economy unemployment will be lower. This is why Keynesians like things like quantitative easing and low interest rates. These things increase inflation. The correlation that they base this approval on, though, does not prove causation.

  • The Monetarist Objection

The Keynesians have a problem. Like most of their analysis, they focus too much on the short term while completely ignoring the long term. In the long run, people adapt to the inflation, and things begin to adjust to the way they were before. In the end, there is no net change in the economy. This is because inflation does not really change any fundamentals in the economy. The distribution of goods has not changed, and so equilibrium will again be reached. Inflation does not create any change, so in the long run, inflation will not create jobs.
  • The Austrian Objection
The Austrian opposition to the Phillips Curve runs a little deeper than the Monetarist opposition. Austrians do not deny that the Phillips Curve is true in the short term. However, Austrians also mention the damage that is done by inflation to the structure of production. In fact, this was the subject of one of my previous articles. So even though you will lower unemployment in the short term, you will create problems for consumers in the short term also, which means that when equilibrium is reached in the long term, everybody will be worse off because of the inflation.

So that Ben Bernanke guy, he's nothing more than a snake oil salesman. Beware the man in the fancy suit. He speaks only to deceive. 


  1. Gotta admire those Keynesians, pressing on despite real evidence that stimulus doesn't work.

    The Phillips Curve sure didn't work in the Carter years. High inflation and high unemployment.

  2. It's not working now either. The only conceivable way it could work, is that the rise in the cost of living forces the average person to work two jobs. That is not prosperity.

  3. What we have now instead is the expectations-augmented Phillips curve, which means that this curve only holds true when people do not expect the inflation. So the policy prescription then it is to indirectly steal from people's savings by surprise, because when they know you are doing it people protect themselves accordingly. The average thief knows that stealth is better than being obvious. It took 10 years of stagflation for economists to learn that lesson.