Edmund S. Phelps

Who Is Edmund S. Phelps?

Edmund S. Phelps is a New Keynesian economist, economics professor, Director of the Center on Capitalism and Society at Columbia University, and winner of the 2006 Nobel Prize in Economic Sciences for his macroeconomic research.

Life and Career

Born in 1933 in Evanston, Illinois, Phelps earned a PhD from Yale and BA from Amherst College. After his graduate studies, in 1959 Phelps worked briefly at the RAND Corporation, a policy think-tank. During the 1960s, he taught at Yale, MIT, and the University of Pennsylvania, before accepting his position at Columbia in 1971. 

The Nobel Laureate did the bulk of his groundbreaking work in the late 1960s through the late 1970s, with his research appearing in "Money-Wage Dynamics and Labor-Market Equilibrium" (Journal of Political Economy, 1968), Microeconomic Foundations of Employment and Inflation Theory (1970), Inflation Policy and Unemployment Theory (1972), and "Stabilizing Powers of Monetary Policy under Rational Expectations" (Journal of Political Economy, 1977). Not one to sit still, Dr. Phelps is still active in making contributions to the body of macroeconomic research. As recently as 2020, he published Dynamism, a book about how certain values drive innovation and economic vitality.

Phelps was awarded the Nobel Prize in his field for his "analysis of intertemporal tradeoffs in macroeconomic policy," in the words of the Nobel Committee, specifically the tradeoffs between capital accumulation and economic growth and between unemployment and inflation. As with all Nobel Prize winners in Economics, Dr. Phelps was intellectually shaped by many mentors and collaborators over his long career. Some of the greats that he mentions in the biographical section of the official Nobel Prize website are Paul Samuelson, James Tobin, Thomas Schelling, and Edward Prescott, all of whom are also Nobel Prize winners in Economics.

Contributions

Phelps's early macroeconomic research focused on macroeconomic growth theory and employment theory. Later, after about 1990, his research focus shifted to general economic systems and economic dynamism. 

Expectations-Augmented Phillips Curve

One of Phelps's major contributions to economics was the insight he provided on the interaction between inflation and unemployment. In particular, Phelps described how current inflation is reliant on expectations about future inflation as well as unemployment.

While previous economists, including Ludwig von Mises and Milton Friedman, had argued that people adapt their inflation expectations to account for the effects of expansionary monetary policy, Phelps is recognized as the first to formally model this phenomenon. Phelps’s model shows how monetary policy can create a short-run tradeoff between inflation and unemployment (a downward-sloping Phillips curve), but in the long run, the Phillips curve is essentially vertical at the natural rate of unemployment. This means that because workers adjust their wage demands based on the observed effect of monetary policy on inflation, in the long run, expansionary monetary policy is not an effective tool to reduce the unemployment rate; it just creates more inflation. 

Capital Formation and Growth

Using the framework of the Solow growth model, Phelps developed what would become known as the golden rule of the intertemporal tradeoff between present and future consumption as it relates to capital investment and growth. Phelps's model formally defines the rate of savings and investment that is necessary to create the maximum level of sustained consumption across successive generations. This is referred to as the golden rule because by saving at this rate — as Phelps paraphrased the Biblical rule — each generation does unto successive generations as they would have previous generations do unto them. 

Economic Dynamism

Following the collapse of the Soviet Union, Phelps became involved in applied research into economic systems and the transformation from a stagnant to a dynamic economy. Phelps argued that economic freedom and individualism — which he defines as entrepreneurialism and autonomy rather than selfishness — are key to achieving a dynamic economy. Phelps believes that this applies not just to former communist economies, but to increasingly rigid Western economies. The key, according to Phelps, is renewed emphasis on a culture that values competition, rewards creativity, and embraces uncertainty.