Edited from here
I think this quote makes it clear that the rational expectations revolution was based on fraudulent intellectual history. I don’t think it shows that the fresh water and new Keynesian schools of macroeconomics have made no useful advances during my lifetime (that is since 1960). I’m sure they have made useful advances, although their claim to have improved on the thought of Samuelson and Solow is based entirely on critiquing the legend of one figure quoted out of context. It is the legend to their figure 2 which shows a stylized Phillips curve. The following paragraph basically explains what a graph is.
I quote the immediately following three paragraphs as published in May 1960 before I was born.
Aside from the usual warning that these are simply our best guesses we must give another caution. All of our discussion has been phrased in short-run terms, dealing with what might happen in the next few years. It would be wrong, though, to think that our Figure 2 menu that related obtainable price and unemployment behavior will maintain its same shape in the longer run. What we do in a policy way during the next few years might cause it to shift in a definite way.
Thus, it is conceivable that after they have produced a low-pressure economy, the believers in demand-pull might be disappointed in the short run; i.e., prices might continue to rise although unemployment was considerable. Nevertheless, it might be that the low-èressure demand would so act upon wage and other expectations as to shift the curve downward in the longer run — so that over a decade, the economy might enjoy higher employment with price stability than our present day estimate would indicate.
But also the opposite is conceivable. A low-pressure economy might build within itself over the years larger and and larger amounts of structural unemployment (the reverseof what happene from 1941 to 1953 as a result of strong war and postwar demands). The result would be an upward shift of our menu of choice, with more and more unemployment being needed just to keep prices stable.
“Analytical Aspects of Anti-Inflation Policy” Paul H. Samuelson; Robert M. Solow American Economic Reivew Vol. 50, No. 2, Papers and Procedings of the Seventy-second Annual Meeting of the American Economic Association (May, 1960), 177-194.
I don’t think that Milton Friedman had anything useful to add.
In 1960 Samuelson and Solow did not at all write what Friedman insinuated that they wrote. In fact, in 1960 they said the Phillips curve showed a short term but *not* a long term tradeoff. They explained that it would shift for two reasons. First, they predicted that it would shift up and down with expected inflation. In other words, Friedman is guilty not only of distorting the claims of Samuelson and Solow but of presenting their clearly stated prediction as his own. Not to put to fine a point on it, he plagiarized them when pretending to critique them. But wait, there’s more.
In the next paragraph they went on to note that the Phillips curve will shift out as cyclical unemployment becomes structural. Samuelson’s nephew (and OJ Blanchard) presented this insight as original 25 years later and called it “hysteresis”. In standard watererd down for the public histories of macro thought it is fairly common to present the progression Samuelson and Solow claimed the Phillips curve was a stable long term tradeoff. Friedman and Phelps achieved a scientific revolution by noting that the Phillips curve depended on expected inflation. Further research suggests it is even more complicated that Friedman knew as the NAIRU can shift due to hysteresis (this is still so brand new that it hasn’t been incorporated into standard macro models after an alleged 25 but actual 53 years). In fact, it is all there in Samuelson and Solow 1960.