Edmund Phelps

Edmund Strother Phelps (born July 26, 1933 in Evanston, Illinois) is an American professor of economics at Columbia University who was awarded the 2006 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, commonly known as the Nobel Memorial Prize in Economics. He is renowned for his work on economic growth at Yale’s Cowles Foundation in the 1960s, introducing in the late ’60s an expectations-based microeconomics into the theory of employment determination and price-wage dynamics. His most seminal work is probably his rudimentary theory of a natural rate of unemployment – its existence, how its size is determined and how market forces may drive unemployment from it. He also advanced the idea of the Golden Rule savings rate, which deals with how much should be spent today versus how much should be saved for future generations.

Phelps received his B.A. at Amherst College in 1955 and his Ph.D. at Yale University in 1959. He started his academic career at Yale, then moved to University of Pennsylvania and, in 1971, to Columbia where he has been McVickar Professor of Political Economy since 1982. He is also the director of Columbia's Center on Capitalism and Society.

He was awarded the Nobel in an announcement made on 9 October 2006. He received the award on his own, breaking the recent pattern of awarding the prize jointly to two or more winners.

Why Phelps won the Nobel

In its announcement, 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."

George Mason University's Professor Tyler Cowen noted at the time of the announcement that "his main contribution is a better understanding of the Phillips curve and the dynamics of short-run unemployment and the concept of the natural rate of unemployment." Cowen also noted that "his 1960s macro work was true, important, and extremely influential. The capital theory work endures and provides a foundation for subsequent theory. The overall scope is impressive, and Phelps's concerns never strayed far from the real world." Cowen concluded by suggesting the award to Phelps meant that: "The big questions still matter. Unemployment, economic growth, labor markets, capital accumulation, fairness, discrimination, and justice across the generations are indeed worthy of economic attention."

Professor Cowen and Berkeley's Professor Brad DeLong both described the choice of Phelps as a good selection, while Harvard's Professor Gregory Mankiw called it "a wonderful choice".

The release issued by the Nobel Committee said in full:

"The work of Edmund Phelps has deepened our understanding of the relation between short-run and long-run effects of economic policy. His contributions have had a decisive impact on economic research as well as policy.

"Low unemployment and low inflation are central goals of stabilization policy. During the 1950s and 1960s the view of a stable tradeoff between inflation and unemployment was established, the so-called Phillips curve. According to this, the price for reduced unemployment was a one-time increase of the inflation rate. Phelps challenged this view through a more fundamental analysis of the determination of wages and prices, taking into account problems of information in the economy. Individual agents have incomplete knowledge about the actions of others and must base their decisions on expectations. Phelps formulated the hypothesis of the expectations-augmented Phillips curve, according to which inflation depends on both unemployment and inflation expectations.

"As a consequence, the long-run rate of unemployment is not affected by inflation but only determined by the functioning of the labor market. It follows that stabilization policy can only dampen short-term fluctuations in unemployment. Phelps showed how the possibilities of stabilization policy in the future depend on today's policy decisions: low inflation today leads to expectations of low inflation also in the future, thereby facilitating future policy making.

"Another issue where intertemporal tradeoffs are of central importance concerns the desirable rate of capital formation. By foregoing consumption for investment in physical as well as human capital (education and research), today's generation can raise the welfare of future generations. Phelps clarified possible distributional conflicts among generations. He also showed that all generations may, under certain conditions, gain from changes in the savings rate. Phelps also pioneered the analysis of the importance of human capital for the diffusion of new technology and, hence, for growth."

References

• Phelps, Edmund S., "A Life in Economics", autobiography published in "The Makers of Modern Economics", Volume II (1995), edited by Arnold Heertje, Edward Elgar Publishing Co., Aldershot, UK, Brookfield, US [1]

Partial Bibliography

• 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.
• Phelps, Edmund S. (1966). "Models of Technical Progress and the Golden Rule of Research". Review of Economic Studies. 33: 133–146.
• Phelps, Edmund S. (1968). "Money-Wage Dynamics and Labor Market Equilibrium". Journal of Political Economy. 76: 678–711.

External links

• Phelps' homepage
• Columbia University press release
• Nobel profile and links to further announcement details
• Edmund Phelps' syndicated op/ed column
• Center on Capitalism and Society -- Edmund Phelps, director
• Summary of Phelps' influence by George Mason University's Professor Tyler Cowen