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Edmund Strother Phelps - Nobel Prize in Economics

Born July 26, 1933 in Evanston, Illinois) is an American professor of economics at Columbia University, who was awarded the 2006 The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, commonly known as the Nobel Prize in Economics. He is renowned for his work on economic growth at Yale's Cowles Foundation in the 1960s, in particular the idea of the Golden Rule savings rate, which deals with how much should be spent today versus how much should be saved for future generations. His most seminal work is probably the introduction of expectations-based microfoundations into the theory of employment determination and price-wage dynamics, leading to his theory of the natural rate of unemployment – its existence, how its size is determined and how market forces may drive unemployment from it.

Phelps has been the McVickar Professor of Political Economy at Columbia University since 1982. He is also the director of Columbia's Center on Capitalism and Society.

He was awarded the Nobel in an announcement made on 9 October 2006. He received the award on his own, breaking the recent pattern of awarding the prize jointly to two or more winners.

Edmund Phelps^[1] was born in 1933 near Chicago, but he grew up and spent his school years in Hastings-on-Hudson, New York, where his family had moved when he was six years old. In 1951, he went to Amherst College as an undergraduate student. At his father's advice, Phelps enrolled in his first economics course in the second year at Amherst. The course was lectured by James Nelson, based on the famous textbook by Paul Samuelson. Phelps was strongly impressed with the possibility of applying formal analysis to one of his old interests, business. Also, he quickly became aware of important unsolved problems and shortcomings of the existing theory, as the existing gap between microeconomics and macroeconomics.

After receiving his B.A. at Amherst in 1955, Phelps went to Yale University for graduate studies. Here, he had as professors some of the greatest economists, as Nobel prize winners James Tobin and Thomas Schelling, and was colleague with Arthur Okun. Also, he was strongly influenced by William Fellner and Henry Wallich, who put a large emphasis on agents' expectations in their courses. Phelps received his Ph.D. from Yale in 1959. His dissertation, based on an idea by Tobin, showed that demand shocks have a higher influence than cost shocks on the correlation between changes in prices and in output.

After receiving his Ph.D., Phelps went to work as an economist for the RAND Corporation. However, feeling that he could not pursue his main research interest, macroeconomics, at RAND (which focused on defense work), Phelps decided to return to the academic world. So, the next year, in 1960, he took a research position at the Cowles Foundation, while also doing some teaching at Yale. While at the Cowles Foundation, his research focused mainly on neo-classical growth theory, following the seminal work of Solow. As part of this research, Phelps published in 1961 a famous paper^[2] 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, as monetary economics or Ricardian equivalence and its relation to optimal growth.

In the late '70s, Phelps and one of his former students, Roman Frydman, conducted some research on the implications of assuming rational expectations, first independently and then in collaboration. Their results suggested that rational expectations are not the correct way to model agents' expectations. They organised a conference on this issue in 1981 and published the proceeds in a 1983 book^[9]. However, as rational expectations were becoming the standard in macroeconomics, the book was initially received with ostility, being largely ignored afterwords^[1].

In 1982 Phelps was appointed the McVickar Professor of Political Economy at Columbia. During the early '80s he wrote an introductory textbook sinthesizing the current economics knowledge. The book, Political Economy, was published in 1985, but had limited classroom adoption.

In the 1980s 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 Conjonctures Économiques (OFCE). He became interested in the puzzle of the persistent high unemployment in Europe and published some papers on this subject with Jean-Paul Fitoussi (the director of OFCE)^[10]. Further study of the subject lead Phelps to believe that it is not a transitory phenomenon, but rather the effect of changes in equilibrium unemployment. During the next years, Phelps tryed to build a theory to determine endogenously the natural rate of unemployment. He published partial research results in a 1994 book