August 16, 2012

Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster {34}

Keynes had many plausible things to say about unemployment and its causes. His ‘mercurial mind’, though, relied on intuition which means that he could not strictly prove his hypotheses. This explains why Keynes's ideas immediately invited bastardizations. One of them, the Phillips curve synthesis, turned out to be fatal. This paper identifies Keynes's undifferentiated employment function as a sore spot. It is replaced by the structural employment function that supersedes also the bastard Phillips curve. It will be demonstrated in a formal rigorous way why there is no trade-off between price inflation and unemployment. The structural Phillips curve predicts stagflation.