Today's Nobel Prize in economics
Here is his autobiography. He was born in Chicago in 1933 and now teaches at Columbia. Here is his CV, and here is another version. Here are recent papers. His Wikipedia entry is a short stub, but watch it grow.
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. He gave the Phillips curve microfoundations and developed the "expectations-augmented Phillips curve." As the name suggests, the level of inflationary expectations matter for how money will influence output.
Here is his memoir on developing the idea of the natural rate of unemployment. His most influential 1960s work suggested that economies possess a natural rate of unemployment, monetary policy can reduce unemployment only temporarily (NB: in his view this is a conclusion, and should not be an axiom in economic models), monetary policy can reduce unemployment temporarily, and Keynesian economics should not treat the rate of unemployment as arbitrarily at the whim of monetary and fiscal policy. He was also concerned with how the natural rate of employment can change over time; here is his 1997 paper on that topic.
The evolution of Phelps's thought on how money can matter is complex. His later work stresses monetary non-neutrality, mostly through non-rational expectations and non-synchronized wage and price setting. His work in the 1980s focused on what the concept of rational expectations means in such complex environments.
Do not assume that early Phelps and late Phelps are saying the same things or arguing against the same opponents. Sometimes it is argued that he redefined macroeconomics twice. After criticizing Keynesianism, he later turned against the "rational expectations" point of view. He is a complex thinker, although it can be hard to divine his "bottom line." He fails to fit inside the "macroeconomics boxes" that have developed since the early 1980s, namely real business cycle theory vs. neo-Keynesianism.
Phelps's work was considered revolutionary in the 1960s, though the subsequent work and influence of Milton Friedman have brought related ideas into the mainstream some time ago.
He also has done work on economic justice and how a Rawlsian maximin analysis might modify the idea of a zero rate of marginal taxation on top earners, as had been suggested by James Mirrlees. Phelps believes that considerations of justice and distribution are important, and neglected, in economic thinking. Once he had a piece in the Journal of Philosophy on ideas of justice in public finance.
He also wrote some well-known papers on what intergenerational justice means, the optimal accumulation of capital, and whether those allocations will prove sustainable and consistent over time. He asks what kind of principles should govern how much capital we should leave for the next generation. His 1961 work on capital theory formulated the notion of a "golden rule" of capital accumulation. It asked what savings rate would maximize per capita income on an ongoing basis. The concepts behind this work remain important for work on capital accumulation and also the sustainability of natural resource use and environmental policy. Phelps also generated the counterintuitive result that the savings rate can be too high, and that all generations could be better off with a lower savings rate. He does not, however, seem to think that this latter idea is policy-relevant. The best summary of this work on capital theory is here, scroll through a bit.
Lately he has been working on the possibility of subsidies for hiring low-wage labor and Eastern European transitions. Here is his book on wage subsidies. Here is a more popular Phelps piece on wage subsidies. He has also done work on the structural dynamics of economies and the underlying factors behind economic innovation. Here is an early Phelps paper on technological diffusion; surprisingly it is his most frequently cited work according to scholar.google.com. He looked to education and population size as key factors driving the rate of economic growth; this piece is a precursor of later work on endogenous growth theory.
Phelps also wrote a 1972 paper on statistical discrimination, one of the earliest formal economic treatments of that topic.
Here is Phelps on Project Syndicate, the link offers numerous essays on current events. The European malaise stems from lack of dynamism. He opposed the Bush tax cuts. Here is Phelps on the rise of the West and the need for humane capitalism. He has a broadly classical liberal slant but has adopted the modern liberal idea that distribution requires government intervention into labor markets and other parts of a modern economy. He has a strong concern with the moral foundations of a free society.
Here are his cites on scholar.google.com. 4600 is a relatively low number for a Nobel Laureate. Vernon Smith for instance has over 40,000. In part this relatively small number reflects the older nature of Phelps's major contributions, and that often his ideas have been absorbed but without citation. Furthermore Phelps does not always write within the context of the most contemporary debates.
Over the last twenty years Phelps has spent a great deal of time in Europe. In general his European influence and reputation is stronger than in the United States.
My take: It is hard to argue with this pick. It is a good selection. 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.
But Phelps is not an economist who has influenced my own thinking much if at all. His major contributions were absorbed, and were standard fare, by the time I was a young'un. For instance I drunk the same macro milk through the writings of Milton Friedman. I find him to be a murky writer, and often he is frustrating to read and hard to pin down. His advocates would characterize him as a "rich" thinker.
What this Prize means: 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. Phelps contributed to all of those areas. Normative questions matter. Relevance and breadth triumph over narrow technical skill.
Addendum: The U.S. has now won six Nobel Prizes in a row, but I bet we don't get the Peace Prize this year.
I think the Nobel Prize web site now has the best summary of his research.
Posted by: DRDR at Oct 9, 2006 8:35:51 AM
Tyler, do you (or Tyrone) have any specific thoughts on Phelps's wage subsidy ideas?
Posted by: William Kaminsky at Oct 9, 2006 9:23:21 AM
I met Phelps a couple years ago at a party; he's a very nice man and
obviously very smart. He wrote some articles on the stock bubble of
the late 1990s stating that is was caused by outsized productivity gains,
a view I still disagree with. It fails to explain why the cost of capital
fell so low and why, therefore, investors were discounting (in some cases
nonexistent) expected cash flows with absurdly low discount rates, which
in my view could be the only explanation for ridiculously high stock prices.
Posted by: Bill Stepp at Oct 9, 2006 9:29:07 AM
And when will a Yank win for literature?
Posted by: Rue Des Quatre Vents at Oct 9, 2006 9:45:17 AM