Phelps, in 2008
July 26, 1933 |
Evanston, Illinois, U.S.
|Institution||Columbia University 1971–
University of Pennsylvania
|Alma mater||Yale University
Hian Teck Hoon
|Contributions||Micro-foundations of macroeconomics
Effects of wage and price expectations
Natural rate of unemployment
Golden Rule savings rate
|Awards||Nobel Memorial Prize in Economic Sciences (2006)
Chevalier de la Legion d'Honneur (2008)
Pico della Mirandola Prize (2008)
Global Economy Prize (2008)
|Information at IDEAS/RePEc|
Edmund Strother Phelps, Jr. (born July 26, 1933) is an American economist and the winner of the 2006 Nobel Memorial Prize in Economic Sciences. Early in his career he became renowned for his research at Yale's Cowles Foundation in the first half of the 1960s on the sources of economic growth. His demonstration of the Golden Rule savings rate, a concept first devised by John von Neumann and Maurice Allais, started a wave of research on how much a nation ought to spend on present consumption rather than save and invest for future generations. His most seminal work inserted a microfoundation—one featuring imperfect information, incomplete knowledge and expectations about wages and prices—to support a macroeconomic theory of employment determination and price-wage dynamics. This led to his development of the natural rate of unemployment—its existence and the mechanism governing its size.
Early life and education
Phelps was born in Evanston, Illinois, and moved with his family to Hastings-on-Hudson, New York when he was six years old, where he spent his school years. In 1951, he went to Amherst College for his undergraduate education. At his father's advice, Phelps enrolled in his first economics course in his second year at Amherst. Economist James Nelson gave the course, which was based on the famous textbook Economics by Paul Samuelson. Phelps was strongly impressed with the possibility of applying formal analysis to one of his old interests: business. He quickly became aware of an important unsolved problem with the existing theory,[specify] and the existing gap between microeconomics and macroeconomics.
After receiving his B.A. at Amherst in 1955, Phelps went to Yale University for graduate studies. While at Yale he studied under future Nobel prize winners James Tobin and Thomas Schelling, among others. Phelps was also strongly influenced by William Fellner and Henry Wallich, whose courses emphasized the expectations of agents. Phelps received his Ph.D. from Yale in 1959.
Research in the 1960s and 1970s
After receiving his Ph.D., Phelps went to work as an economist for the RAND Corporation. However, feeling he could not pursue macroeconomics (his main research interest) at RAND (which focused on defense work), Phelps decided to return to the academic world. So, the next year, in 1960, he took a research position at the Cowles Foundation, while also teaching at Yale. While at the Cowles Foundation, his research focused mainly on neo-classical growth theory, following the seminal work of Solow. As part of this research, in 1961 Phelps published a famous paper on the Golden Rule savings rate, one of his major contributions to economic science. He also wrote papers dealing with other areas of economic theory, such as monetary economics or Ricardian equivalence and its relation to optimal growth.
His position at Cowles gave Phelps the chance to interact with Arthur Okun and other notables in the field. He was able to collaborate with other top economists working on growth theory, including David Cass and fellow Nobelist Tjalling Koopmans. During the academic year 1962–63 Phelps visited MIT, where he was in contact with future Nobel prize winners Paul Samuelson, Robert Solow and Franco Modigliani.
In 1966, Phelps left Yale and moved to University of Pennsylvania, where he was offered a tenured position as professor of economics. While at Penn, Phelps' research focused mainly on the link between employment, wage setting and inflation, leading to his influential 1968 paper "Money-Wage Dynamics and Labor Market Equilibrium". This research contributed important insights in the microeconomics of the Phillips curve, including the role of expectations (in the form of adaptive expectations) and imperfect information in the setting of wages and prices. It also introduced the concept of the natural rate of unemployment and argued that labor market equilibrium is independent of the rate of inflation, thus there is no long run tradeoff between unemployment and inflation. This observation, if accurate, would have the crucial implication that the Keynesian policy of demand management has only transitory effects and cannot be used to control the long run rate of unemployment in the economy. In January 1969, Phelps organized a conference at Penn in support of the research on the micro-foundations of inflation and employment determination. The conference papers were published the next year in a book which had a strong and lasting influence, becoming known as the "Phelps volume". During this period, along with the research on the Phillips curve, Phelps also collaborated with other economists on research regarding economic growth, the effects of monetary and fiscal policy and optimal population growth.
In the following years, an element in Phelps's foundations came under heavy criticism with the introduction of Muth's rational expectations, which was popularized by future Nobel prize winner Robert Lucas, Jr.. Phelps, with Calvo and John Taylor, started a program to rebuild Keynesian economics with rational expectations by employing sticky wages and prices. They achieved this by explicitly incorporating in models the fact that wage contracts are set in advance for multiple periods, an idea originating from Phelps' 1968 paper. This research lead to a paper published with Taylor in 1977, proving that staggered wage setting gives monetary policy a role in stabilizing economic fluctuations. The use of staggered wage and price setting, further developed by Calvo in a 1983 paper, became a cornerstone of New Keynesian economics. During the '70s, Phelps and Calvo also collaborated on research regarding optimal contracts under asymmetric information.
Phelps spent the year 1969–1970 at the Center for Advanced Study in Behavioral Science at Stanford University. Discussions with fellow Nobel prize winners Amartya Sen and Kenneth Arrow, and especially the influence of the philosophy of John Rawls, whom he met during the year at the Center, led Phelps to undertake some research outside macroeconomics. As a result, in 1972 he published seminal research in the new field he named statistical discrimination. He also published research on economic justice, applying ideas from Rawls' book A Theory of Justice.
In 1971, Phelps moved to the Economics Department at Columbia University, which also included future Nobel prize winners William Vickrey and James J. Heckman (future laureate Robert Mundell joined three years later), as well as Phoebus Dhrymes, Guillermo Calvo and John B. Taylor. There he published research on the inflation tax and the impact of fiscal policy on optimal inflation. In 1972, Phelps published a new book which focused on the derivation of policy implications of his new theory. The book further popularized his "expectations-augmented Phillips curve", and also, among other things, introduced the concept of hysteresis with regard to unemployment (prolonged unemployment is partially irreversible as workers lose skill and become demoralized).
In the late '70s, Phelps and one of his former students, Roman Frydman, conducted some research on the implications of assuming rational expectations, first independently and then in collaboration. Their results suggested that rational expectations are not the correct way to model agents' expectations. They organized a conference on this issue in 1981 and published the proceedings in a 1983 book. However, as rational expectations were becoming the standard in macroeconomics, the book was initially received with hostility, and was largely ignored. The financial crisis of 2007, and the attendant failure of rational expectations models to predict it, led to a renewed interest in this work.
In 1982 Phelps was appointed the McVickar Professor of Political Economy at Columbia. During the early '80s he wrote an introductory textbook synthesizing the current economics knowledge. The book, Political Economy, was published in 1985, but had limited classroom adoption.
Research and work since mid-1980s
'In the 1980s Phelps increased collaboration with European universities and institutions, including Banca d'Italia (where he spent most of his 1985-86 sabbatical and Observatoire Français des Conjonctures Économiques (OFCE). He became interested in the puzzle of the persistent high unemployment in Europe despite no let-up in inflation and published on this subject with Jean-Paul Fitoussi (the director of OFCE). Fitoussi, Jean-Paul and Edmund S. Phelps (1988). The Slump in Europe: Open Economy Theory Reconstructed. Basil Blackwell. Further study of the subject led Phelps to believe that it is not a transitory phenomenon, but rather the effect of changes in equilibrium unemployment. During the next years, Phelps tried to build a theory to determine endogenously the natural rate of unemployment. He published partial research results in a 1994 book, Structural Slumps: The Modern Equilibrium Theory of Employment, Interest and Assets. Phelps also collaborated closely with Luigi Paganetto at the University of Rome Tor Vergata and, between 1988–98, as co-organizers of the Villa Mondragone International Seminar.
In 1990 Phelps took part in a mission from the then-forming EBRD to Moscow, where he and Kenneth Arrow designed a proposal for the reform of the USSR. After the EBRD was established, he became a member of its Economic Advisory Board, where he stayed until 1993. From work at EBRD and collaboration with his former student Roman Frydman, Phelps developed a strong interest in the Eastern European transition economies.
Over the late 1980s and early 1990s, Phelps created a new non-monetary theory of employment in which business asset values drive the natural rate. This theory, first fully set out in his book Structural Slumps (1994), explains Europe’s slump without disinflation in the 1980s: the elevation of the world real rate of interest, declining opportunities for continuing technological catch-up and the mushrooming social wealth granted by Europe’s emerging welfare state play the main causal roles. Two sequel papers in 2000 and 2001 on the theory of ‘structural booms’ explained America’s inflationless expansion in the late 1990s and explicitly implied its transience. These and other papers develop the thesis that the great economic swings experienced by the West in the past century not only originate in non-monetary shocks but also operate fundamentally through non-monetary mechanisms.
In the mid-1990s his research turned to what he called economic inclusion. He published in 1997 a book for the general public, Rewarding Work, about the causes and cures of the joblessness and low wages among disadvantaged workers.
Phelps’s current work is about the benefits and sources of a country’s structural dynamism – the enterprise and creativity of entrepreneurs, the skill of financiers in selecting and supporting the best projects, and the knowledge managers draw upon in evaluating and making use of new methods and products. Every dynamic economy has its doldrums and even torpid economies may rise, perhaps with delay, to an extraordinary opportunity. Yet great dynamism, he argues, brings advantages in virtually every dimension of economic performance, not just in productivity. For Phelps, the challenges presented in a creative and evolving business sector provide most people with their main vehicle for the exploration, exercise and development of their talents. In the already advanced economies this is perhaps the best reason why policy must aim to build a business sector of high dynamism and broad inclusion. The research task is to identify the institutions that are pathways to dynamism and the institutions that are obstructions. Phelps’s own research on dynamism began at the European Bank for Reconstruction and Development in 1990 and 1992–93, where he worked on the theory of capitalism and issues of mass privatization in eastern Europe. Later in the decade he turned to studying a range of economic institutions in western Europe and the United States. He conducted research with a focus on the Italian economy as Senior Advisor to the Project <Italy in Europe> of the Consiglio Nazionale delle Ricerche in 1997–2000.
In 2001 he and Roman Frydman founded the Center on Capitalism & Society at Columbia (now a unit of Arts and Sciences) to promote and conduct research on capitalism.
"What theory can we use to get us out of the impending slump quickly and reliably? To use the 'new classical' theory of fluctuations begun at Chicago in the 1970s – the theory in which the "risk management" models are embedded – is unthinkable, since it is precisely the theory falsified by the asset price collapse. The thoughts of some have turned to John Maynard Keynes. His insights into uncertainty and speculation were deep. Yet his employment theory was problematic and the 'Keynesian' policy solutions are questionable at best....At the end of his life Keynes wrote of 'modernist stuff, gone wrong and turned sour and silly'. He told his friend Friedrich Hayek he intended to re-examine his theory in his next book. He would have moved on. The admiration we all have for Keynes's fabulous contributions should not sway us from moving on."
Honors and awards
In 2006, Phelps was awarded the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, referred to, colloquially, as the Nobel Prize in Economics for (in the words of the award committee) "his analysis of inter-temporal tradeoffs in macroeconomic policy". In announcing the prize, the Royal Swedish Academy of Sciences said Phelps' work had "deepened our understanding of the relation between short-run and long-run effects of economic policy."
In the year 2000, Phelps was made a Distinguished Fellow of the American Economic Association. In February 2008, he was named Chevalier of France's Legion of Honor. Four months later he was given the Global Economy Prize of Kiel Institute for the World Economy.
Furthermore, Phelps received honorary degrees from several renowned institutions acknowledging his academic work. In 1985 he was awarded an honorary degree from his alma mater, the Amherst College. In June 2001 he received an honorary doctorate from the University of Mannheim and in October 2003 from Universidade Nova Lisboa, in July 2004 from University of Paris Dauphine and in October 2004 from the University of Iceland. He also holds honorary doctorates from the Institut d'Etudes Politiques de Paris (2006), the Universidad de Buenos Aires (2007), Tsinghua University (2007), and the Université libre de Bruxelles (2010).
- Phelps, Edmund S. (1961). "The Golden Rule of Capital Accumulation". American Economic Review 51: 638–643.
- Phelps, Edmund S. (1966). Golden Rules of Economic Growth: Studies of Efficient and Optimal Investment. W. W. Norton, New York. ISBN 0-393-09708-0.
- Phelps, Edmund S. (1966). "Models of Technical Progress and the Golden Rule of Research". Review of Economic Studies (The Review of Economic Studies Ltd.) 33 (2): 133–146. doi:10.2307/2974437. JSTOR 2974437.
- Phelps, Edmund S. (1968). "Money-Wage Dynamics and Labor Market Equilibrium". Journal of Political Economy 76 (S4): 678–711. doi:10.1086/259438.
- Phelps, Edmund S. et al. (1970). Microeconomic Foundations of Employment and Inflation Theory. W. W. Norton, New York. ISBN 0-393-09326-3.
- Phelps, Edmund S. (1972). Inflation Policy and Unemployment Theory. W. W. Norton, New York. ISBN 0-393-09395-6.
- Phelps, Edmund S. (1972). "The Statistical Theory of Racism and Sexism". American Economic Review 62: 659–661.
- Phelps, Edmund S. and John B. Taylor (1977). "Stabilizing Powers of Monetary Policy under Rational Expectations". Journal of Political Economy 85 (1): 163–190. doi:10.1086/260550.
- Phelps, Edmund S., Roman Frydman et al. (1983). Individual Forecasting and Aggregate Outcomes: 'Rational Expectations' Examined. Cambridge University Press. ISBN 0-521-25744-1.
- Phelps, Edmund S. (1990). Seven Schools of Macroeconomic Thought. Oxford University Press. ISBN 978-0-19-828333-1.
- Phelps, Edmund S. (1994). Structural Slumps: The Modern Equilibrium Theory of Employment, Interest and Assets. Harvard University Press. ISBN 0-674-84373-8.
- Phelps, Edmund S. (1997). Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise. Harvard University Press. ISBN 978-0-674-02694-0.
- Phelps, Edmund S. (2003). Designing Inclusion. Cambridge University Press. ISBN 0-521-81695-5.
- Phelps, Edmund S. (October 2009). "Economic Justice and the Spirit of Innovation". First Things: A Journal of Religion, Culture, and Public Life.
- Phelps, Edmund S. (1995). "Chapter 5: A Life in Economics". In Arnold Heertje. The Makers of Modern Economics. Volume II (First ed.). Aldershot; Brookfield: Edward Elgar Publishing Co. ISBN 1-85898-237-5. Retrieved 2008-08-18.
- The Golden Rule of Accumulation: a Fable for Growthmen; The American Economic Review, Vol. 51, No. 4, pp. 638-643, 1961 http://www.policonomics.com/wp-content/uploads/The-Golden-Rule-of-Accumulation-a-Fable-for-Growthmen.pdf
- "The Golden Rule of Capital Accumulation" (see Publications)
- Microeconomic Foundations of Employment and Inflation Theory by Phelps et al. (see Publications)
- The Royal Swedish Academy of Sciences (2006), "Edmund Phelps’s Contributions to Macroeconomics"
- "Stabilizing Powers of Monetary Policy under Rational Expectations" (see Publications)
- Calvo, Guillermo (1983). "Staggered Prices in a Utility-Maximizing Framework". Journal of Monetary Economics 12 (3): 383–398. doi:10.1016/0304-3932(83)90060-0.
- "The Statistical Theory of Racism and Sexism" (see Publications)
- "Inflation Policy and Unemployment Theory" (see Publications)
- "Individual Forecasting and Aggregate Outcomes" (see Publications)
- Phelps, Edmund S. and Kenneth J. Arrow (1991). "Proposed Reforms of the Economic System of Information and Decision in the USSR: Commentary and Advice". Rivista di Politica Economica 81
- Phelps, Edmund (November 4, 2008). "Keynes had no sure cure for slumps" (PDF). The Financial Times. Columbia University. Retrieved 2011-11-26.
- "Edmund S. Phelps – Autobiography". Nobelprize.org.
- Stop Acting Rich and Live Like a Millionaire, Thomas Stanley, 2009, John WIley & Sons, Kinlde location 2885
- "Short run – Long run" (Press release). The Royal Swedish Academy of Sciences. October 9, 2006. Retrieved 2008-08-17.
- Edmund Phelps official webpage at Columbia University
- Edmund Phelps' syndicated op/ed column from project-syndicate.org
- Center on Capitalism and Society – Edmund Phelps, director
- Who is Edmund Phelps from whoswhoineconomics.com
- Summary of Phelps' influence by George Mason University's Professor Tyler Cowen
- Phelps and the Nobel Prize by Arnold Kling. EconLog and Econlib
- True and False Lessons Drawn from the Structural Slump, a November 21, 2011 speech by Phelps to the Council on Foreign Relations
- Roberts, Russ (February 15, 2010). "Phelps on Unemployment and the State of Macroeconomics". EconTalk. Library of Economics and Liberty.
- Nobel Prize
- Macroeconomics for a Modern Economy, Phelps' Prize Lecture at nobelprize.org
- Professor Edmund S. Phelps Wins 2006 Nobel Prize in Economics, a Columbia University press release
- "Edmund Phelps’s Contributions to Macroeconomics". nobelprize.org. Archived from the original on 2007-01-03. Retrieved 2011-11-26.