Summary of Occasional Paper 51
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The 1976 Nobel Lecture
Inflation and Unemployment:
The New Dimension of Politics
MILTON FRIEDMAN
1. In economics and other social sciences, like the natural
sciences, there is no certain knowledge, only tentative
theories (hypotheses) that cannot be 'proved' but can fail to
be rejected by experience.
2. In both natural and social sciences value-judgements influence scientific judgements, but scientific ('positive') knowledge is essential in forming value- ('normative') judgements.
3. Inflation is socially destructive, creates abnormally high
unemployment, mis-uses economic resources, and endangers human freedom not because value-judgements
lead man to seek these consequences but because errors in
scientific judgement have prevented them from seeing the
consequences in advance. These consequences can therefore
be corrected by the clearer understanding yielded by ('positive') economic analysis.
4. Recent developments in positive economics have illuminated
the relationship between inflation and unemployment. They
can be analysed in three stages.
5. In Stage I the hypothesis was that the amount of unemployment varied inversely with the rate of change in wages :
high unemployment was accompanied by falling wages, low
unemployment by rising wages. This was expressed in the
Phillips Curve ('negatively sloping' because the relationship
was inverse). Government could then choose between low
unemployment with more inflation and high unemployment
with less inflation.
6. Experience in some countries did not always confirm this
inverse relationship. And some economists had theoretical
doubts about it.
7. An alternative hypothesis was therefore developed in
Stage II — that distinguished between the short- and long-run
effects of unexpected ('surprise') changes in total money
demand. Unemployment varied not with the rate of inflation