|Born||July 26, 1933|
Evanston, Illinois, U.S.
|Institution|| Columbia University 1971– |
University of Pennsylvania
|Alma mater|| Yale University |
| James Tobin |
|Influences|| Paul Samuelson |
|Contributions|| Microfoundations of macroeconomics |
Expectations in wage and price-setting
Natural rate of unemployment
Imagination in innovating
Golden Rule rate of saving
|Awards|| Nobel Memorial Prize in Economic Sciences, 2006|
Chevalier de la Legion d'Honneur, 2008
Pico Mirandola Prize, 2008
Global Economy Prize, 2008
China Friendship Award, 2014
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Edmund Strother Phelps (born July 26, 1933) is an American economist and the recipient of the 2006 Nobel Memorial Prize in Economic Sciences.
Early in his career, he became known for his research at Yale's Cowles Foundation in the first half of the 1960s on the sources of economic growth. His demonstration of the golden rule savings rate, a concept related to work by John von Neumann, started a wave of research on how much a nation should spend on present consumption rather than save and invest for future generations.
Phelps was at the University of Pennsylvania from 1966 to 1971 and moved to Columbia University in 1971. His most seminal work inserted a microfoundation, one featuring imperfect information, incomplete knowledge and expectations about wages and prices, to support a macroeconomic theory of employment determination and price-wage dynamics. That led to his development of the natural rate of unemployment: its existence and the mechanism governing its size. In the early 2000s, he turned to the study of business innovation.
He is the founding director, since 2001, of Columbia's Center on Capitalism and Society. He has been McVickar Professor of Political Economy at Columbia since 1982.
Phelps was born on July 26, 1933 in Evanston, Illinois, and he moved with his family to Hastings-on-Hudson, New York when he was six, where he spent his school years. [ citation needed ] He quickly became aware of an important unsolved problem with the existing economic theory and the existing gap between microeconomics and macroeconomics.In 1951, he went to Amherst College for his undergraduate education. At his father's advice, Phelps enrolled in his first economics course in his second year at Amherst. Economist James Nelson gave the course, which was based on the famous textbook Economics by Paul Samuelson. Phelps was strongly impressed with the possibility of applying formal analysis to business.
After receiving his B.A. at Amherst in 1955, Phelps went to Yale University for graduate studies. At Yale, he studied under future Nobel laureates James Tobin and Thomas Schelling, among others. Phelps was also strongly influenced by William Fellner whose course emphasized the expectations of agents. Phelps received his Ph.D. in Economics from Yale in 1959.
After receiving his Ph.D., Phelps went to work as an economist for the RAND Corporation. However, feeling he could not pursue macroeconomics at RAND (which focused on defense work), Phelps decided to return to the academic world. In 1960, he took a research position at the Cowles Foundation while he was also teaching at Yale. At the Cowles Foundation, his research focused mainly on neoclassical growth theory, following the seminal work of Robert Solow.[ citation needed ] As part of his research, in 1961 Phelps published a famous paper 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, such as monetary economics or Ricardian equivalence and its relation to optimal growth.
His position at Cowles gave Phelps the chance to interact with Arthur Okun and other notables in the field. He was able to collaborate with other top economists working on growth theory, including David Cass and fellow Nobelist Tjalling Koopmans. During the 1962-63 academic year, 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 the University of Pennsylvania to take up a tenured position as a professor of economics. At Penn, Phelps's 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"and others. The 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 unemployment and argued that labor market equilibrium is independent of the rate of inflation and so is no long run tradeoff between unemployment and inflation. That, if accurate, would have the crucial implication that the Keynesian policy of demand management has only transitory effects and so cannot be used to control the long-term rate of unemployment in the economy. In January 1969, Phelps organized a conference at Penn in support of the research on the microfoundations of inflation and employment determination. The conference papers were published the next year in a book that had a strong and lasting influence; it became known as the "Phelps volume". Along with his 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.
In the following years, an element in Phelps's foundations came under heavy criticism with the introduction of John Muth's rational expectations, which was popularized by future Nobel prize winner Robert Lucas, Jr.. Phelps, with Calvo and John Taylor, started a program to rebuild Keynesian economics with rational expectations by employing sticky wages and prices. They did so by explicitly incorporating in models the fact that wage contracts are set in advance for multiple periods, an idea originating from Phelps's 1968 paper. This research lead to a paper published with Taylor in 1977,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, became a cornerstone of New Keynesian economics. During the 1970s, Phelps and Calvo also collaborated on research on optimal contracts under asymmetric information.
Phelps spent 1969–70 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, led Phelps to undertake some research outside macroeconomics. As a result, in 1972, he published seminal research in the new field that he named statistical discrimination.He also published research on economic justice, applying ideas from Rawls's 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.[ citation needed ] There, he published research on the inflation tax and the impact of fiscal policy on optimal inflation. In 1972, Phelps published a new book which focused on the derivation of policy implications of his new theory. The book further popularized his "expectations-augmented Phillips curve" and introduced the concept of hysteresis with regard to unemployment (prolonged unemployment is partially irreversible as workers lose skill and become demoralized).
In the late 1970s, Phelps and one of his former students, Roman Frydman, conducted some research on the implications of assuming rational expectations, at first independently and then in collaboration. Their results suggested that rational expectations are not the correct way to model agents' expectations.[ citation needed ] They organized a conference on the issue in 1981 and published the proceedings in a 1983 book. However, as rational expectations were becoming the standard in macroeconomics, the book was initially received with hostility and was largely ignored. The financial crisis of 2007–2008, along with the failure of rational expectations models to predict it, led to a renewed interest in the work.
In 1982, he was appointed the McVickar Professor of Political Economy at Columbia. During the early 1980s, he wrote an introductory textbook synthesizing contemporary economics knowledge. The book, Political Economy, was published in 1985 but had limited classroom adoption.
In the 1980, 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 conjectures économiques (OFCE). He became interested in the puzzle of the persistent high unemployment in Europe despite no pause in inflation and published on the subject with Jean-Paul Fitoussi (the director of OFCE). [ citation needed ] During the following years, Phelps tried to build a theory to determine endogenously the natural rate of unemployment. He published partial research results in a 1994 book, Structural Slumps: The Modern Equilibrium Theory of Employment, Interest and Assets. Phelps also collaborated closely with Luigi Paganetto at the University of Rome Tor Vergata and, between 1988 and 1998, as co-organizers of the Villa Mondragone International Seminar.Further study led Phelps to believe that it is not a transitory phenomenon but the effect of changes in equilibrium unemployment.
In 1990 Phelps took part in a mission from the new EBRD to Moscow, where he and Kenneth Arrow designed a proposal for the reform of the Soviet Union.After the EBRD was established, he became a member of its Economic Advisory Board, where he stayed until 1993. From his work at EBRD and collaboration with his former student, Roman Frydman, Phelps developed a strong interest in Eastern Europe's transition economies.
Over the late 1980s and the early 1990s, Phelps created a new non-monetary theory of employment in which business asset values drive the natural rate. The theory, first fully set out in his book Structural Slumps (1994), explains Europe's slump without disinflation in the 1980s: the elevation of the world real rate of interest, declining opportunities for continuing technological catching up and the mushrooming social wealth granted by Europe's emerging welfare state play the main causal roles. Two sequel papers in 2000 and 2001 on the theory of 'structural booms' explained US inflationless expansion in the late 1990s and claimed its transience.[ citation needed ] His papers develop the thesis that the great economic swings experienced by the West in the past century not only originate in non-monetary shocks but also operate fundamentally by non-monetary mechanisms. This book, as well as subsequent papers, argued that the fluctuation of unemployment rates in the United States, the United Kingdom, and France stemmed from the accumulation of wealth with minimal investment.
In the mid-1990s, his research turned to what he called economic inclusion. He published in 1997 a book for the general public, Rewarding Work about the causes and cures of the joblessness and low wages among disadvantaged workers.
Phelps's current work is about the benefits and sources of a country's structural dynamism: the enterprise and creativity of entrepreneurs, the skill of financiers in selecting and supporting the best projects, and the knowledge managers draw upon in evaluating and making use of new methods and products.Every dynamic economy has its doldrums and even torpid economies may rise, perhaps with delay, to an extraordinary opportunity. However, great dynamism, he argues, brings advantages in virtually every dimension of economic performance, not just in productivity. For Phelps, the challenges presented in a creative and evolving business sector provide most people with their main vehicle for the exploration, exercise, and development of their talents.
In the already-advanced economies, that is perhaps the best reason that policy must aim to build a business sector of high dynamism and broad inclusion. The research task is to identify the institutions that are pathways to dynamism and the institutions that are obstructions.
Phelps's own research on dynamism began at the European Bank for Reconstruction and Development in 1990 and 1992–93, where he worked on the theory of capitalism and issues of mass privatization in Eastern Europe. Later in the decade, he turned to studying a range of economic institutions in Western Europe and the United States. He conducted research with a focus on the Italian economy as Senior Advisor to Italy in Europe of the Consiglio Nazionale delle Ricerche from 1997 to 2000.
In 2001, he and Roman Frydman founded the Center on Capitalism & Society at Columbia (now a unit of Arts and Sciences) to promote and conduct research on capitalism.
In 2008, writing in the wake of the Great Recession, Phelps criticized the "false" models of neoclassical economics, but he also wrote with skepticism regarding Keynesian resurgence:
What theory can we use to get us out of the impending slump quickly and reliably? To use the 'new classical' theory of fluctuations begun at Chicago in the 1970s – the theory in which the "risk management" models are embedded – is unthinkable, since it is precisely the theory falsified by the asset price collapse. The thoughts of some have turned to John Maynard Keynes. His insights into uncertainty and speculation were deep. Yet his employment theory was problematic and the 'Keynesian' policy solutions are questionable at best....At the end of his life Keynes wrote of 'modernist stuff, gone wrong and turned sour and silly'. He told his friend Friedrich Hayek he intended to re-examine his theory in his next book. He would have moved on. The admiration we all have for Keynes's fabulous contributions should not sway us from moving on.
Phelps severely criticizes the economic policy of U.S. president Donald Trump. It feels "like economic policy at a time of fascism [...]. The leader controls the economy and tells the companies how things are going to be done."
In June 2020, he and other Nobel laureates in Economics, as well as architects, chefs and leaders of international organizations, signed the appeal in favour of the purple economy (“Towards a cultural renaissance of the economy”), published in Corriere della Sera ,El País and Le Monde .
In 1974 Phelps married Viviana Montdor.Publications have noted that despite his many accomplishments, Phelps does not own a car.
In 1981 Phelps was elected to become a member of the National Academy of Science in the USA. In 2006, he was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, referred to, colloquially, as the Nobel Prize in Economics for "his analysis of inter-temporal tradeoffs in macroeconomic policy." In announcing the prize, the Royal Swedish Academy of Sciences said Phelps's work had "deepened our understanding of the relation between short-run and long-run effects of economic policy."
In the year 2000, Phelps was made a Distinguished Fellow of the American Economic Association. In February 2008, he was named Chevalier of France's Legion of Honor. Four months later he was given the Global Economy Prize of Kiel Institute for the World Economy.
Furthermore, Phelps received honorary degrees from several renowned institutions acknowledging his academic work. In 1985, he was awarded an honorary degree from his alma mater, Amherst College. In June 2001, he received an honorary doctorate from the University of Mannheim and, in October 2003, from Universidade Nova de Lisboa; in July 2004, from Paris Dauphine University and in October 2004, from the University of Iceland. He also holds honorary doctorates from the Institut d'Etudes Politiques de Paris (2006), the University of Buenos Aires (2007), Tsinghua University (2007), and the Université libre de Bruxelles (2010).From 2010 to 2016, he served as Dean of New Huadu Business School at Minjiang University in Fuzhou.
Keynesian economics are the various macroeconomic theories and models of how aggregate demand strongly influences economic output and inflation. In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy. Instead, it is influenced by a host of factors – sometimes behaving erratically – affecting production, employment, and inflation.
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and government spending to regulate an economy’s growth and stability. This includes regional, national, and global economies. According to a 2018 assessment by economists Emi Nakamura and Jón Steinsson, economic "evidence regarding the consequences of different macroeconomic policies is still highly imperfect and open to serious criticism."
Full employment is a situation in which there is no cyclical or deficient-demand unemployment. Full employment does not entail the disappearance of all unemployment, as other kinds of unemployment, namely structural and frictional, may remain. For instance, workers who are "between jobs" for short periods of time as they search for better employment are not counted against full employment, as such unemployment is frictional rather than cyclical. An economy with full employment might also have unemployment or underemployment where part-time workers cannot find jobs appropriate to their skill level, as such unemployment is considered structural rather than cyclical. Full employment marks the point past which expansionary fiscal and/or monetary policy cannot reduce unemployment any further without causing inflation.
In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. Rational expectations ensure internal consistency in models involving uncertainty. To obtain consistency within a model, the predictions of future values of economically relevant variables from the model are assumed to be the same as that of the decision-makers in the model, given their information set, the nature of the random processes involved, and model structure. The rational expectations assumption is used especially in many contemporary macroeconomic models.
New Keynesian economics is a school of macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroeconomics.
This aims to be a complete article list of economics topics:
Robert Emerson Lucas Jr. is an American economist at the University of Chicago, where he is currently the John Dewey Distinguished Service Professor Emeritus in Economics and the College. Widely regarded as the central figure in the development of the new classical approach to macroeconomics, he received the Nobel Prize in Economics in 1995 "for having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeconomic analysis and deepened our understanding of economic policy". He has been characterized by N. Gregory Mankiw as "the most influential macroeconomist of the last quarter of the 20th century." As of 2020, he ranks as the 11th most cited economist in the world.
The Phillips curve is a single-equation economic model, named after William Phillips, hypothesizing an inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy. Stated simply, decreased unemployment, in an economy will correlate with higher rates of wage rises. Phillips did not himself state there was any relationship between employment and inflation; this notion was a trivial deduction from his statistical findings. Paul Samuelson and Robert Solow made the connection explicit and subsequently Milton Friedman and Edmund Phelps put the theoretical structure in place. In so doing, Friedman was to successfully predict the imminent collapse of Phillips' a-theoretic correlation.
The natural rate of unemployment is the name that was given to a key concept in the study of economic activity. Milton Friedman and Edmund Phelps, tackling this 'human' problem in the 1960s, both received the Nobel Memorial Prize in Economic Sciences for their work, and the development of the concept is cited as a main motivation behind the prize. A simplistic summary of the concept is: 'The natural rate of unemployment, when an economy is in a steady state of "full employment", is the proportion of the workforce who are unemployed'. Put another way, this concept clarifies that the economic term "full employment" does not mean "zero unemployment". It represents the hypothetical unemployment rate consistent with aggregate production being at the "long-run" level. This level is consistent with aggregate production in the absence of various temporary frictions such as incomplete price adjustment in labor and goods markets. The natural rate of unemployment therefore corresponds to the unemployment rate prevailing under a classical view of determination of activity.
A macroeconomic model is an analytical tool designed to describe the operation of the problems of economy of a country or a region. These models are usually designed to examine the comparative statics and dynamics of aggregate quantities such as the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the level of prices.
John Brian Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University, and the George P. Shultz Senior Fellow in Economics at Stanford University's Hoover Institution.
Thomas John Sargent is an American economist and the W.R. Berkley Professor of Economics and Business at New York University. He specializes in the fields of macroeconomics, monetary economics, and time series econometrics. As of 2020, he ranks as the 29th most cited economist in the world. He was awarded the Nobel Memorial Prize in Economics in 2011 together with Christopher A. Sims for their "empirical research on cause and effect in the macroeconomy".
The policy-ineffectiveness proposition (PIP) is a new classical theory proposed in 1975 by Thomas J. Sargent and Neil Wallace based upon the theory of rational expectations, which posits that monetary policy cannot systematically manage the levels of output and employment in the economy.
Georgios Alogoskoufis is a professor of economics at the Athens University of Economics and Business since 1990. He was a member of the Hellenic Parliament from September 1996 till October 2009 and served as Greece's Minister of Economy and Finance from March 2004 till January 2009.
Guillermo Antonio Calvo is an Argentine-American economist who is Director of Columbia University's mid-career Program in Economic Policy Management in their School of International and Public Affairs (SIPA).
The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis, or just neo-Keynesianism was a post-World War II academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Keynes with neoclassical economics. Being Keynesian in the short run and neoclassical in the long run, neoclassical synthesis allowed the economy to adjust via fiscal and monetary policies in the short run whilst predicting that equilibrium in the long run will be reached without state intervention. The synthesis, formulated by a group of economists, dominated economics in the post-war period and formed the mainstream of macroeconomic thought in the 1950s, 1960s and 1970s.
New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics, especially rational expectations.
Non-accelerating inflation rate of unemployment (NAIRU) is a theoretical level of unemployment below which inflation would be expected to rise. It was first introduced as NIRU by Franco Modigliani and Lucas Papademos in 1975, as an improvement over the "natural rate of unemployment" concept, which was proposed earlier by Milton Friedman.
The Brookings Papers on Economic Activity (BPEA) is a journal of macroeconomics published twice a year by the Brookings Institution Press. Each issue of the journal comprises the proceedings of a conference held biannually by the Economic Studies program at the Brookings Institution in Washington D.C. The conference and journal both “emphasize innovative analysis that has an empirical orientation, take real-world institutions seriously, and is relevant to economic policy.”
Macroeconomic theory has its origins in the study of business cycles and monetary theory. In general, early theorists believed monetary factors could not affect real factors such as real output. John Maynard Keynes attacked some of these "classical" theories and produced a general theory that described the whole economy in terms of aggregates rather than individual, microeconomic parts. Attempting to explain unemployment and recessions, he noticed the tendency for people and businesses to hoard cash and avoid investment during a recession. He argued that this invalidated the assumptions of classical economists who thought that markets always clear, leaving no surplus of goods and no willing labor left idle.
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