Edmund Phelps

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Lore & Background

Phelps was born on July 26, 1933, in Evanston, Illinois. When he was six, he moved with his family to Hastings-on-Hudson, New York, where he spent his school years. In 1951, he went to Amherst College for his undergraduate education. On 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 his Ph.D., he worked as an economist for the RAND Corporation, but feeling he could not pursue macroeconomics there, he returned to academia. In 1960, he took a research position at the Cowles Foundation while also teaching at Yale. At the Cowles Foundation, his research focused mainly on neoclassical growth theory, following the seminal work of Robert Solow. In 1961, he published a famous paper on the Golden Rule savings rate. In 1966, he left Yale and moved to the University of Pennsylvania to take up a tenured position as a professor of economics. In 1971, Phelps moved to the Economics Department at Columbia University. In 1982, he was appointed the McVickar Professor of Political Economy at Columbia University. From 2001 he was the founding director of Columbia's Center on Capitalism and Society. On January 1, 2022, his title changed to McVickar Professor Emeritus of Political Economy.

Reader's Guide

Phelps's 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. His first pioneering paper on this topic was in 1967, where he developed a rigorous model of the Expectations Augmented Phillips Curve. He worked out solution values for many macro variables by maximizing the discounted value of social welfare utility function, based on inflation and unemployment. Phelps (1967) labelled U* in his model as the equilibrium unemployment rate and also the warranted rate, but himself later started using the term natural rate. In his more influential 1968 paper 'Money-Wage Dynamics and Labor Market Equilibrium,' Phelps laid out his framework. In Phelps's model, since there may be involuntary unemployment even at the natural rate, a full catch-up for money wages in response to price increases may not hold. The research introduced the concept of the natural rate of unemployment and argued that labor market equilibrium is independent of the rate of inflation, so there is no long-run tradeoff between unemployment and inflation. 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 became known as the 'Phelps volume.' In the following years, an element in Phelps's foundations came under heavy criticism with the introduction of John Muth's rational expectations, 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. This research led 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. In 1972, Phelps published seminal research in the new field that he named statistical discrimination. He also published research on economic justice, applying ideas from John Rawls's A Theory of Justice. In the late 1970s, Phelps and one of his former students, Roman Frydman, conducted research on the implications of assuming rational expectations. Their results suggested that rational expectations are not the correct way to model agents' expectations. They organized a conference on the issue in 1981 and published the proceedings in a 1983 book. The 2008 financial crisis, along with the failure of rational expectations models to predict it, led to a renewed interest in the work. In the early 2000s, he turned to the study of business innovation.

Did You Know?

• Phelps's 1961 paper on the Golden Rule savings rate was a concept related to work by John von Neumann.
• Phelps (1967) originally labelled the equilibrium unemployment rate as U* and called it the 'warranted rate' before later adopting the term 'natural rate.'
• In 1972, Phelps published seminal research in a new field he named 'statistical discrimination.'
• Phelps's 1977 paper with John Taylor proved that staggered wage setting gives monetary policy a role in stabilizing economic fluctuations.
• The 2008 financial crisis led to renewed interest in Phelps and Frydman's 1983 book critiquing rational expectations.