Edmund Phelps was born in 26 July 1933 in Evanston, Illinois. He is an economics professor at Columbia University and was awarded the Nobel Prize for Economics in 2006. The Nobel Prize was awarded for his groundbreaking working on examining the role of expectations in the Labour market and also factors that influence economic growth.
Brought up in New York Phelps went to study at Amherst College in 1951. Here he studied Economics, and after graduating from Amherst he went to Yale as a post graduate. At Yale he came into contact and was taught by some of the great economists James Tobin and Thomas Schelling (who were later to be awarded the nobel prize.) It was also at Yale that Phelps was introduced to the importance of expectations in labour market decisions. This was due to lecturers such as William Fellner. After a brief spell working for the RAND Corporation. Phelps returned to academia which gave him the opportunity to spend more time in research.
In the 1960s he produced a seminal research paper on factors influencing economic growth. In particular he examined the role of savings in influencing economic growth now and in the future. The paper was based on the “Golden Savings Rule” He noted that higher savings ratios in the present enable higher levels of investment and therefore higher economic growth in the future. However future beneficiaries of economic growth are not able to influence decisions now, therefore often in society there is insufficient savings and investment in human capital. This analysis is particularly significant given the US current low savings rate and inability to invest in the future.
Later work of Phelps concentrated on examining the Keynesian Phillips Curve. Phelps wanted to look at the problem of wage expectations and information asymmetries in explaining weakness in the model. Research by Phelps concluded that when workers and firms base their decisions on adaptive expectations wages are frequently higher than the market clearing level. This causes involuntary unemployment. Furthermore it was the research of Phelps that suggested the trade off between inflation and unemployment suggested by Keynes was only viable in the short run. In the long run there was no permanent trade off. Basically he argued that the natural rate of unemployment was independent of the inflation rate. Thus expansionary fiscal policies would be unlikely to reduce unemployment in the long term. This research was made more significant by the experience of the 1970s which led to stagflation.
In the late 1970s Phelps also spent some time at Stanford where he became acquainted with John Rawls the leading philosopher on social justice. This encouraged Phelps to broaden his economic interests and examine issues of Economic Justice.
In October 2006 Phelps was awarded the Nobel Peace prize. This was mainly in recognition for his work on the Phillips curve and a better understanding of the natural rate of unemployment. Professor Tyler Cowen commented:
"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, labour markets, capital accumulation, fairness, discrimination, and justice across the generations are indeed worthy of economic attention."
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