Phillips Curves Were Introduced in the 1960s as a “Deus ex machina” to Save the Orthodox-Keynesian Model

The ten years of 1966 to 1976 are labeled by Sinclair the “Decade of Disillusion.” The disillusion stemmed from the inability of the Orthodox-Keynesian model to explain what was going on in the world at that time. The most primitive Keynesian models assumed fixed prices; hence the models were inapplicable to questions about inflation except at full employment, anything beyond which the so-called classical model, involving a crude “Quantity Theory” of prices, held to be a “special case.” The introduction of the Phillips curve in the early sixties, at first as a deus ex machina, supposedly provided the missing link between the real sector and the price level. In time, Phillips-type phenomena were incorporated into the most sophisticated Keynesian-based econometric models, some of which ran into hundreds of equations. Even with the assistance of the Phillips curve, however, the existing varieties of Orthodox-Keynesian models were utterly inconsistent with the real-world phenomenon of stagflation, or more precisely, the breakdown of any apparently systematic, unidirectional movement between the level of economic activity and the rate of inflation. In truth, there were other difficulties that rendered Keynesian analysis inconsistent with the facts of the real world, but the incompatibility with stagflation was perhaps the key issue leading to the crisis for Keynesian orthodoxy and the demise of its mechanistic worldview.

—Don Bellante, “The Fork in the Keynesian Road: Post-Keynesians and Neo-Keynesians,” in Dissent on Keynes: A Critical Appraisal of Keynesian Economics, ed. Mark Skousen (New York: Praeger Publishers, 1992), 122.