Finance & Investing
Section 1
Core Idea
The Phillips Curve describes the observed inverse relationship between unemployment and inflation: when unemployment falls, wages and prices tend to rise, and vice versa. Originally an empirical finding (A.W. Phillips, 1958), it became central to macroeconomic policy — the idea that policymakers face a trade-off between the two. Later work (Friedman, Phelps) showed the trade-off is short-run only; in the long run, expectations adjust and the curve shifts. For founders, the mental model is broader: many systems present apparent trade-offs that hold in the short term but break down as participants adapt. Beware optimising one variable and assuming the other stays fixed.
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Section 2
How to See It
Macro & Markets
You're seeing it when a hot labour market drives wage inflation and compresses margins. Hiring costs rise fastest when talent is scarce — the Phillips trade-off playing out in your P&L.
Company Growth
You're seeing it when rapid scaling (low "unemployment" of resources) creates quality or cost inflation — more hires, more overhead, more coordination cost. Growth has an inflation equivalent.
Section 3
How to Use It
Recognise the short-run trade-off: pushing hard on one variable (growth, hiring, spend) often inflates another (cost, complexity, dilution). Plan for the second-order effect, not just the first. And remember the long-run lesson — participants adapt. A wage hike today becomes the new baseline tomorrow; expectations reset. Build strategy for the world after the adjustment, not just the current curve.
Decision filter
"Are we treating a short-run trade-off as permanent? What happens when expectations adjust — does our advantage hold?"
As a founder
Use the Phillips Curve lens when planning aggressive hiring or spending cycles. The short-run gain (more output) comes with an inflation cost (higher burn, compressed margins). Model both sides and plan for the adjustment period when the trade-off shifts.
Section 5
Founders & Leaders
George SorosFounder, Soros Fund Management; macro investor
Soros built his career reading macro trade-offs that others treated as stable. His theory of reflexivity — that market participants' beliefs change the fundamentals — parallels the Phillips Curve's long-run breakdown: the trade-off shifts as expectations adapt. Founders can apply this lens by questioning any "stable trade-off" in their business. If you're exploiting a pricing gap, a talent arbitrage, or a cost advantage, ask how long before the other side of the curve adjusts. The edge isn't in finding the trade-off — it's in anticipating when it moves.
Section 7
Connected Models
Reinforces
Supply and Demand
The Phillips Curve is a specific application of supply-demand dynamics in labour markets. When labour supply tightens, price (wages) rises. The general model applies everywhere you see the trade-off.
Tension
Goodhart's Law
When policymakers target the Phillips trade-off directly (e.g. targeting a specific unemployment rate), the relationship breaks — expectations adjust and the curve shifts. Goodhart's Law explains why the trade-off is unstable when used as a policy lever.
Leads-to
AD-AS Model
The Phillips Curve feeds into aggregate demand–aggregate supply analysis. Understanding the unemployment-inflation trade-off is one input to the broader macro picture of output, price levels, and policy.
Section 8
One Key Quote
— Milton Friedman, 1968 AEA Presidential Address"There is always a temporary trade-off between inflation and unemployment; there is no permanent trade-off."
Section 11
Summary & Further Reading
The Phillips Curve describes a short-run trade-off between unemployment and inflation that breaks down as expectations adjust. Use it to recognise that apparent trade-offs in your business may shift when participants adapt — plan for the world after the adjustment.
01
Paper
The original empirical paper establishing the curve.
02
Paper
The expectations-augmented critique that reshaped macro policy thinking.
03
Book
Reflexivity and why macro trade-offs shift when participants act on them.