How Chicago Overcame Cambridge
Murdoch University Working Paper 151
Posted: 9 Sep 1996
Date Written: July 1996
This essay examines Milton Friedman's influence as a political economist, focusing attention on his (and George Stigler's) avoidance of a 'regression race' over the merits of imperfect competition, his persuasive use of Walrasian language, and his successful prediction that inflation would be associated with increasing rates of unemployment. As a consequence of this predictive success, it became widely accepted that unemployment would gravitate towards its Natural Rate (a magnitude influenced by frictional and structural factors). This article presents a fresh view of this policy-revolution by suggesting that the magnetic pull of the Natural Rate of unemployment is not required to explain the stagflation which ended the Old Keynesian era. As inflation was increasing in the 1960s, several economists argued that rates of unemployment were also increasing. These perceptions were clearly at variance with the prevailing trade-off interpretation of the Phillips curve, which suggested that the rise in inflation would be accompanied by a reduction in rates of unemployment. This article, therefore, attempts to describe the largely forgotten, dissenting pre-history of Friedman's successful assault on the trade-off orthodoxy of the 1960s. These dissenting perceptions were mostly based on factors other than expectational considerations. They consisted of insights based on observations of labor market behavior. In contrast, Friedman's insight was couched in macroeconomic terms, with strong microeconomic foundations. This episode may shed some light on the nature of influence in the economics profession in the 1960s.
JEL Classification: B20, E6, L00
Suggested Citation: Suggested Citation