ABSTRACT
In the 1960s, much of the economics profession accepted the finding that a tradeoff existed between inflation and growth. In the 1970s, more sophisticated expectations-augmented Phillips curves became popular. Ironically, one of the clearest expositions of the expectations-augmented Phillips curve was provided by David Hume in 1752:
Accordingly we find, that in every kingdom, into which money begins to flow in greater abundance than formerly, every thing takes a new face; labour and industry gain life; the merchant becomes more enterprizing; the manufacturer more diligent and skillful; and even the farmer follows his plough with greater alacrity and attention… To account, then, for this phenomenon, we must consider, that tho’ the high price of commodities be a necessary consequence of the encrease of gold and silver, yet it follows not immediately upon that encrease; but some time is requir’d before the money circulate thro’ the whole state, and make its effects be felt on all ranks of people. At first, no alteration is perceiv’d; by degrees, the price rises, first of one commodity, then of another; till the whole at last reaches a just proportion, with the new quantity of specie, which is in the kingdom. In my opinion, ’tis only in this interval or intermediate situation, betwixt the acquisition of money and rise of prices, that the encreasing quantity of gold and silver is favourable to industry.
