The resurrection and fall of homo oeconomicus

The neoclassical counterrevolution based on Phelps' and Friedman's unique equilibrium unemployment rate–the natural rate of unemployment--hit Keynesianism badly. Based on neoclassical axioms (maximization, equilibrium), they argued that macroeconomic policy could not reduce unemployment in the long run or even the short run because unemployment results from individual utility maximization within the given institutional framework (i.e., incentive structure); it is the optimum. Again, unemployment with a choice. Expansionary macroeconomic policy would push the economy away from its optimum and produces inflation rather than higher production and employment, resulting in stagflation, the simultaneous occurrence of inflation, and unemployment. Since Phelps and Friedman published their natural rate theory before stagflation occurred in the 1970s, it was praised as a theory ahead of the facts, but it was simply a regression to Pre-Keynesian theory, ignoring market interdependencies, expectations, and reducing workers' motivations for real wages (goods). Responses to money wage variations were again merely "money illusion." The perception and political acceptance of natural rate theory is a first-class example of how axiomatic economic theory frames thinking and can narrow the space of economic opportunities. Although stagflation was short-lived, the theory remained and guided economic policy not only among conservatives but also among social-democratic politicians. It is also an example that deductive reasoning is easily satisfied with insufficient empirical evidence if it fits the deduced presumptions.