Edmund Phelps

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Edmund S. Phelps

Columbia University homepage photo
Born	July 26, 1933 Evanston, Illinois
Residence	USA
Nationality	American
Field	Economics
Institution	Columbia University 1971- University of Pennsylvania 1966-71 Cowles Foundation 1960-66
Alma mater	Yale University Amherst College
Notable students	Roman Frydman Mordecai Kurz
Known for	Natural rate of unemployment Golden Rule savings rate
Notable prizes	Nobel Prize in Economics (2006)

Edmund Strother Phelps (born July 26, 1933 in Evanston, Illinois) is an American professor of economics at Columbia University, who was awarded the 2006 The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, commonly known as the Nobel Prize in Economics. He is renowned for his work on economic growth at Yale's Cowles Foundation in the 1960s, in particular 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. His most seminal work is probably the introduction of expectations-based microfoundations into the theory of employment determination and price-wage dynamics, leading to his theory of the natural rate of unemployment – its existence, how its size is determined and how market forces may drive unemployment from it.

Phelps has been the McVickar Professor of Political Economy at Columbia University 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.

Contents 1 Biography 1.1 Early life and education 1.2 Research in the '60s and '70s 1.3 European collaborations since mid-'80s 2 Nobel Prize 3 Selected publications 4 Footnotes 5 References 6 External links

[edit] Biography

[edit] Early life and education

Edmund Phelps^[1] was born in 1933 near Chicago, but he grew up and spent his school years in Hastings-on-Hudson, New York, where his family had moved when he was six years old. In 1951, he went to Amherst College as an undergraduate student. At his father's advice, Phelps enrolled in his first economics course in the second year at Amherst. The course was lectured by James Nelson, based on the famous textbook by Paul Samuelson. Phelps was strongly impressed with the possibility of applying formal analysis to one of his old interests, business. Also, he quickly became aware of important unsolved problems and shortcomings of the existing theory, as the existing gap between microeconomics and macroeconomics.

After receiving his B.A. at Amherst in 1955, Phelps went to Yale University for graduate studies. Here, he had as professors some of the greatest economists, as Nobel prize winners James Tobin and Thomas Schelling, and was colleague with Arthur Okun. Also, he was strongly influenced by William Fellner and Henry Wallich, who put a large emphasis on agents' expectations in their courses. Phelps received his Ph.D. from Yale in 1959. His dissertation, based on an idea by Tobin, showed that demand shocks have a higher influence than cost shocks on the correlation between changes in prices and in output.

[edit] Research in the '60s and '70s

After receiving his Ph.D., Phelps went to work as an economist for the RAND Corporation. However, feeling that he could not pursue his main research interest, macroeconomics, 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 doing some 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, Phelps published in 1961 a famous paper^[2] 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, as monetary economics or Ricardian equivalence and its relation to optimal growth.

Work at the Cowles Foundation gave Phelps the chance to interact with other top economists working on growth theory, as David Cass or fellow nobelist Tjalling Koopmans. Also, 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 unemployement and showed that labour market equilibrium is independent of the rate of inflation, thus there is no long run tradeoff between unemployment and inflation. This observation has 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 organised at Penn a conference in support of the research on the microfoundations of inflation and employment determination. The conference papers were published the next year in a book^[3] which had a strong and lasting influence, becoming known as the "Phelps volume".^[1][4] 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.

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, lead Phelps to undertake some research outside macroeconomics. As a result, in 1972 he published seminal research in the new field he named statistical discrimination.^[5] 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. He published research on the inflation tax and the impact of fiscal policy on optimal inflation. In 1972, Phelps published a new book^[6] 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 following years, the classical Keynesian economics came under heavy critique with the introduction of Muth's rational expectations, which were popularized by future Nobel prize winner Robert Lucas, Jr.. Phelps, with Calvo and John Taylor, started a programme 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' seminal 1968 paper. This research lead to a paper published with John Taylor in 1977,^[7] 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,^[8] became a cornerstone of New Keynesian economics. During the '70s, Phelps and Calvo also collaborated on research regarding optimal contracts under asymmetric information.

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 organised a conference on this issue in 1981 and published the proceeds in a 1983 book.^[9] However, as rational expectations were becoming the standard in macroeconomics, the book was initially received with hostility, being largely ignored afterwards.^[1]

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.

[edit] European collaborations since mid-'80s

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 and published some papers on this subject with Jean-Paul Fitoussi (the director of OFCE).^[10] Further study of the subject lead Phelps to believe that it is not a transitory phenomenon, but rather the effect of changes in equilibrium unemployment. During the next years, Phelps tryed to build a theory to determine endogenously the natural rate of unemployment. He published partial research results in a 1994 book.^[11] 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 Moskow, where he and Kenneth Arrow designed a proposal for the reformal of the USSR.^[12] 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.

[edit] Nobel Prize

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 in the Marginal Revolution blog 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".

[edit] Selected publications

• 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 33: 133-146. 
• Phelps, Edmund S. (1968). "Money-Wage Dynamics and Labor Market Equilibrium". Journal of Political Economy 76: 678-711. 
• 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: 163-190. 
• 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. (1994). Structural Slumps: The Modern Equilibrium Theory of Employment, Interest and Assets. Harvard University Press. ISBN 0-674-84373-8. 
• Phelps, Edmund S. (2003). Designing Inclusion. Cambridge University Press. ISBN 0-521-81695-5. 

[edit] Footnotes

[edit] 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]
• The Royal Swedish Academy of Sciences (2006), "Edmund Phelps’s Contributions to Macroeconomics", Advanced information on Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel [2]

[edit] 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
• Phelps and the Nobel Prize by Arnold Kling. EconLog and Econlib
• Edmund Phelps's Contributions to Macroeconomics

Persondata
NAME	Phelps, Edmund Strother
ALTERNATIVE NAMES
SHORT DESCRIPTION	American economist
DATE OF BIRTH	July 26, 1933
PLACE OF BIRTH	Evanston, Illinois
DATE OF DEATH	living
PLACE OF DEATH