Wages and unemployment—a non-monetarist rejoinder

Abstract

that the 'expectations-augmented' Phillips curve provides a model of the determination of money wages. He says that in its monetarist version the Phillips curve determines unemployment, not money wages: monetarist theory asserts only that movements of wages are in general determined by some combination of expectations and excess supply or demand. He argues that the evidence I quoted against fully competitive determination of wages in the short run is not inconsistent with this broader view of wage determination and concludes, somewhat ingenuously, that the failure of my evidence to refute the broad view is a positive reason for supposing the monetarist theory to be correct. Friedman certainly stated that the causation runs from wages to unemployment, and not the other way round, both in the lecture I quoted and subsequently in his Nobel Prize lecture (Friedman, 1975, 1977). Thus, on the test of consistency with those texts, Horsman is correct and my interpretation was indeed wrong. But the matter is not quite so easily disposed of. A little further consideration will show that Friedman's version of the Phillips curve necessarily carries with it the very process of wage deter mination discussed and refuted in my paper. The confusing verbal formulation used by Friedman reflects the failure of neoclassical theory to give a coherent explanation of how the invisible hand sets and maintains equilibrium prices. The possibility of equilibrium prices and wage rates under general neoclassical assumptions is demonstrated by numerous 'existence' theorems, but the necessity for their occurrence has not been demonstrated in any such general way. Thus Friedman follows the mainstream of modern theory in couching his exposition in terms