Straightening the Phillips curve, 1968–1976

Abstract

This paper looks at the change in the British Treasury's macroeconomic thinking between Friedman's statement of the natural rate doctrine in 1968 and Prime Minister Callaghan's public abandonment of Keynesian demand management in 1976. Simultaneously rising unemployment and inflation made the Treasury sceptical about the old Phillips curve from the start, but, far from moving smoothly to the expectations-augmented version, it hesitated between assuming the curve had shifted outwards, abandoning any idea of a Phillips curve, and adhering to a ‘New Cambridge’ curve where unemployment made inflation worse. Eventually a tense Treasury meeting abandoned money illusion by majority vote.