Edmund Phelps is the McVickar Professor of Economics and Director, Center on Capitalism and Society, Earth Institute, Columbia University.
The Royal Swedish Academy of Sciences awarded the 2006 Nobel Prize in Economic Sciences to Edmund Phelps for “his analysis of intertemporal tradeoffs in macroeconomic policy.”
Quotes from Edmund Phelps’s April 2008 lecture at Trinity University:
Any account of my evolution as an economist must narrate my early struggle to depart from the scientism and determinism of the neo-Keynesian school – repairing as best I could their omission of expectations, learning and knowledge creation – only to find myself bypassed by a New Classical school founded on belief in “rational expectations.” In the next decades, I struggled against the scientism and determinism of the New Classical school – emphasizing their omission of Knightian uncertainty, Keynesian indeterminacy and Hayekian discovery. Then I was rescued by fervent supporters and an august body from domination by the neo-neoclassicals and am called “revolutionary.” This biography will be tightly focused on that story line. It is, I would say, a part of the story of 20th century economics.
I could sense that the neo-Keynesian research, though intriguing and possibly useful in some ways, had utterly abandoned the modernist emphasis on incomplete information and imperfect knowledge in favor of some new method or methodology with which I was not at all comfortable. Instinctively, as Keynes would have said, I understood that the neo-Keynesian models, in abstracting from these things, inadvertently left no role for humans to play. There could be no beliefs as distinct from what is true, no expectations as distinct from what is or will be, no mental stimulation and challenge, no problem-solving, no creativity and no discovery.
My next efforts to put “people” into models lay in the area of employment and inflation dynamics. For me, the Phillips Curve could be neither theoretically acceptable nor empirically reliable, since it took no account whatsoever of what may happen to various expectations when monetary policy or a banking development pushes up or pulls down the inflation rate. My 1967 paper arguing that “disinflation” requires the monetary authority to drive down “expectations” of inflation and my 1968 paper on “money-wage dynamics” and “labor-market equilibrium” were the seminal papers out of which the others sprung. My 1969 paper outlining my “islands parable” had an important influence – too much in some respect, as it took attention away from the incentive-wage theory developed in the 1968 paper. The Microeconomic Foundations volume of 1970 signaled the arrival of a micro-macro movement in economics.
With my 1994 book Structural Slumps, which developed out of The Slump in Europe, which Jean-Paul Fitoussi and I published in 1988, I may seem to have overcome my distrust of so-called rational expectations. After a shift in the parameters of the model – a structural shift – I suppose that the economy follows a “perfect-foresight path” until the next structural shift comes along. This looks like rational expectations but it is not…. What I had in mind was something different: after a regime is over, it will never be revisited and people have no idea what the next structural shift might be like. Business life is just one damned thing after another.
In the view I have taken in several papers and lectures in the present decade, the American economy and a few other national economies, defined as a structure of institutions and attitudes, are mechanisms for the generation – always with lots of unknown probabilities – of novel commercial ideas…. I have been using the word dynamism to refer to the power, or propensity, of the economy to generate novel products that are commercially successful – thus, the fertility and aim of the economy in producing new ideas…. As I see it, this mechanism is the essence of capitalism.
I have argued in my Nobel Prize lecture, published in 2007, that we do not need to choose between inclusion and dynamism. It may very well be that continental Europe kept taking state and community measures to push up inclusion – and solidarity – until it damaged its already questionable dynamism. However, I argue that, in general, introducing institutional structures for greater dynamism does not only serve the self-realization of the more advantaged. Such structures are job-creating and, in pulling up employment as well as self-support and respect among the disadvantaged, serve to increase self-realization among the disadvantaged as well. Economies without dynamism cannot be just.