3 ms·

Does anyone have a good, non-biased resource explaining why keynesians cannot explain stagflation, and what Milton Friedman did during this era to solve that pr

by ep103 7y ago

Does anyone have a good, non-biased resource explaining why keynesians cannot explain stagflation, and what Milton Friedman did during this era to solve that problem and thereby launch us into the modern neo-liberal moment? Whenever I search for this, I have a tendency to find articles that already assume the reader has read on the topic numerous times (like this one), or they they only address the topic in the most watered-down and overtly partisan manner. From reading between the lines on the first few pages of google results, it seems like Keynesian thought in the 1970s hadn't evolved far enough to recognize that inflation could have multiple driving factors and could impact different parts of the economy disproportionately. My limited understanding too is that this was resolved theoretically and with obvious and clear explanation in the years afterward (now referred to as neo-keynesian), but by then Milton Friedman had been lionized as the new economic "truth" and the universe moved on in his direction.

bhl 7y ago
Very few things in economics are resolved theoretically; they're more often improved empirically. Take for example stagflation. Previously, economists assumed a simple linear relationship between inflation and unemployment (Philips curve). That failed to hold in the 1970s. And now, economists assume a simple linear-dynamics relationship between expected inflation and unemployment (augmented Philips curve).
QuesnayJr 7y ago
In 1958, A. W. Phillips discovered an empirical relationship between inflation and unemployment, now called the Phillips Curve (https://en.wikipedia.org/wiki/Phillips_curve https://en.wikipedia.org/wiki/Phillips_curve) -- the higher the inflation rate, the lower the unemployment rate. Milton Friedman argued that the trade-off only existed for unexpected inflation. Once everyone anticipates that inflation, it will have no impact on unemployment. That's what happened in the stagflation era. The New Keynesians use an expectations-adjusted Phillips curve, which take into account this effect on expectations. In New Keynesianism there is a short-run trade-off, because prices do not instantly adjust, but there is no long-run trade-off once prices actually do adjust.
nyolfen 7y ago
i don't have anything that fits that criteria specifically but you might be interested in philip mirowski's book on the social history of neoliberal thought: http://gen.lib.rus.ec/book/index.php?md5=16D0875D5BCCD74581E3F57A71BF307C http://gen.lib.rus.ec/book/index.php?md5=16D0875D5BCCD74581E...
skybrian 7y ago
Inflation was fixed when the Federal Reserve (led by Volker) increased interest rates to over 17%, causing the early 80's recession. [1] We've had other problems since then, but not inflation, so it increased confidence that the the Fed knows what it's doing. But I don't know what Friedman had to do with this or how it affected theory. [1] https://en.wikipedia.org/wiki/Early_1980s_recession_in_the_United_States https://en.wikipedia.org/wiki/Early_1980s_recession_in_the_U...
- perl4ever 7y ago
  This is an unsatisfying view of things, for me, because it seems like low inflation and interest rates are a global phenomenon. As a pessimist, it seems to me that assuming there are resilient homeostatic mechanisms preventing inflation, then they must be obscure, given that politicians have not been able to screw them up for quite some time. And that means that when they do break for whatever reason, markets may not be aware for an indefinite amount of time. Like, for instance, lately people have been worrying about the US President trying to bully the Fed. It's hard to tell if he's had any effect, if he was right in his opinion, and whether he has found or will find any new lever to influence them. I don't really think it makes sense to regard the Fed as an entity that still entails the Volcker era, and I'm doubtful that markets really have faith in it that way. I'm inclined to think more along the lines that often markets just go along assuming nothing has changed until there is a shock or crisis that shows they have. Like Wile E. Coyote running off a cliff.
  - QuesnayJr 7y ago
    According to current thinking, the homeostatic mechanism is inflation expectations. People currently have "anchored" inflation expectations in that expect any inflation to remain stable in the long run. If inflation expectations become unanchored (like in the 70s), then it requires larger and larger inflation to stimulate the economy.
viburnum 7y ago
Keynesians (the real ones, not the so-called New Keynesians) understood stagflation as it was happening. There was a deadlock between capital and labor. The oil embargo starting in 1973 lowered America’s real income. The question was who was going to suffer for it. It led to a political crisis, which in the short run was handled by allowing wages and prices to both run up, but it was eventually resolved in favor of capital during the Volcker shock, which deliberately created mass unemployment to undermine worker power. It didn’t have to turn out this way, though. There were other options. Here’s an excellent article: https://nplusonemag.com/issue-34/reviews/other-peoples-blood-2/ https://nplusonemag.com/issue-34/reviews/other-peoples-blood...

by ep103 7y ago

bhl 7y ago

Very few things in economics are resolved theoretically; they're more often improved empirically. Take for example stagflation. Previously, economists assumed a simple linear relationship between inflation and unemployment (Philips curve). That failed to hold in the 1970s. And now, economists assume a simple linear-dynamics relationship between expected inflation and unemployment (augmented Philips curve).

QuesnayJr 7y ago

In 1958, A. W. Phillips discovered an empirical relationship between inflation and unemployment, now called the Phillips Curve (https://en.wikipedia.org/wiki/Phillips_curve https://en.wikipedia.org/wiki/Phillips_curve) -- the higher the inflation rate, the lower the unemployment rate. Milton Friedman argued that the trade-off only existed for unexpected inflation. Once everyone anticipates that inflation, it will have no impact on unemployment. That's what happened in the stagflation era. The New Keynesians use an expectations-adjusted Phillips curve, which take into account this effect on expectations. In New Keynesianism there is a short-run trade-off, because prices do not instantly adjust, but there is no long-run trade-off once prices actually do adjust.

nyolfen 7y ago

i don't have anything that fits that criteria specifically but you might be interested in philip mirowski's book on the social history of neoliberal thought: http://gen.lib.rus.ec/book/index.php?md5=16D0875D5BCCD74581E3F57A71BF307C http://gen.lib.rus.ec/book/index.php?md5=16D0875D5BCCD74581E...

skybrian 7y ago

Inflation was fixed when the Federal Reserve (led by Volker) increased interest rates to over 17%, causing the early 80's recession. [1] We've had other problems since then, but not inflation, so it increased confidence that the the Fed knows what it's doing. But I don't know what Friedman had to do with this or how it affected theory. [1] https://en.wikipedia.org/wiki/Early_1980s_recession_in_the_United_States https://en.wikipedia.org/wiki/Early_1980s_recession_in_the_U...

perl4ever 7y ago
This is an unsatisfying view of things, for me, because it seems like low inflation and interest rates are a global phenomenon. As a pessimist, it seems to me that assuming there are resilient homeostatic mechanisms preventing inflation, then they must be obscure, given that politicians have not been able to screw them up for quite some time. And that means that when they do break for whatever reason, markets may not be aware for an indefinite amount of time. Like, for instance, lately people have been worrying about the US President trying to bully the Fed. It's hard to tell if he's had any effect, if he was right in his opinion, and whether he has found or will find any new lever to influence them. I don't really think it makes sense to regard the Fed as an entity that still entails the Volcker era, and I'm doubtful that markets really have faith in it that way. I'm inclined to think more along the lines that often markets just go along assuming nothing has changed until there is a shock or crisis that shows they have. Like Wile E. Coyote running off a cliff.
- QuesnayJr 7y ago
  According to current thinking, the homeostatic mechanism is inflation expectations. People currently have "anchored" inflation expectations in that expect any inflation to remain stable in the long run. If inflation expectations become unanchored (like in the 70s), then it requires larger and larger inflation to stimulate the economy.

viburnum 7y ago

Keynesians (the real ones, not the so-called New Keynesians) understood stagflation as it was happening. There was a deadlock between capital and labor. The oil embargo starting in 1973 lowered America’s real income. The question was who was going to suffer for it. It led to a political crisis, which in the short run was handled by allowing wages and prices to both run up, but it was eventually resolved in favor of capital during the Volcker shock, which deliberately created mass unemployment to undermine worker power. It didn’t have to turn out this way, though. There were other options. Here’s an excellent article: https://nplusonemag.com/issue-34/reviews/other-peoples-blood-2/ https://nplusonemag.com/issue-34/reviews/other-peoples-blood...