Edmund S. Phelps

How does Edmund Phelps connect economics with the arts?

His wife Viviana has suggested meeting in their Upper East Side apartment, with one of the best views on Central Park the city has to offer. Phelps, firm handshake, inviting smile, talks about how much he enjoys New York, the theatre, the museums, the opera. And the conversations that are possible with the city’s interesting, sophisticated people. He is a cosmopolitan who enjoys dinner parties, lively dialogues and the diversity of the place he calls home. How does that go together with the rather serious and straight world of economics?

“Oh, I love economics”, Phelps assures. He pauses for a moment, thinking about how to put it best. “At some point in my early life, I realized that economics is a very messy subject, full of rich questions, a richness of problems. Very challenging.” Perhaps the richness he saw as a young man led him to work on an extraordinary range of topics, helping to understand employment theory, monetary theory, inflationary dynamics, growth theory, public finance. As his colleague and good friend Richard Robb puts it, “Ned” did not choose to become an expert in one area alone but moved on to other matters constantly. It is a challenge, of course, to talk to someone like that, almost impossible to touch on all the things he has worked on throughout his long career. So why not start with an obvious choice, the reason he is called nothing less than a pioneer of modern economics?

In the area of employment economics, there was this idea of wages being really rigid.

How did Edmund Phelps reshape employment and inflation theory?

The work Phelps is best known for deepened, as the Nobel committee put it, the profession’s understanding of the relation between short-run and long-run effects of macroeconomic policy. Though this might sound a little vague (or too hard to get), Phelps can easily explain why his work was fundamental. “In the area of employment economics”, he begins, “there was this idea of wages being really rigid, that’s just the way it is, guy, forget about it.”

How did Edmund Phelps redefine unemployment and wage-setting models?

But that was not good enough for a young man who had only recently entered the field, with an open mind and the urge to discover new things. So he started his research on the link between employment, wage setting and inflation. The work that followed brought, to put it simple, the people into play.

“Back in the old days”, Richard Robb explains, “more inflation led to less unemployment. It seemed that that’s how the world worked, except sometimes when it didn’t.” Phelps would ask: Who are those agents in economic models, and what are they doing? He argued that economic models had to take into account the fact that people formed expectations based on imperfect information and incomplete knowledge. It was an important insight that shed light on the working of markets and supported a different approach on employment determination and price-wage dynamics.

Phelps remembers the battles he had to fight during the early years of his career. His research challenged the prevailing views of the 1960s and earned him some criticism by those in the profession who did not want lifelike actors in their models. What Phelps felt was a more realistic approach to macroeconomics, others dismissed. He admits that it was not a lot of fun back then. But he remained stubborn, he assures with a smirk on his face. After all, he had decided not to immerse in the humanities but to pursue a career in economics instead – thanks to his father.

My father said, ‘Would you do me one favor, would you take one economics course?

How did Edmund Phelps’ early life shape his economics?

“When I was in college and in love with philosophy, my father said, ‘Would you do me one favor, would you take one economics course?’ What could I say? Of course I did.” There is a serious look on his face, making clear it was out of question not to do as his father had asked him to. His parents had raised him at the height of the Great Depression. The boy was six years old when the family had to move from Chicago to Hastings, New York, where Phelps’ father, not a successful business man but in love with business anyway, was eventually able to find a job again. Phelps remembers how his father would bring home stories from the office every day and would give his son the daily newspapers to read.

His family background and the education he received as a child encouraged young Phelps to think about economies on the level of the individual, what situations people face and what sort of thinking they evolve in response to that. He might have become a philosophy teacher – if it had not been for his parents. At the time of his father’s request, he had started his second year at Amherst College, Massachusetts, taking courses in the humanities only. To enter economics was not a path he would have chosen for himself. But he respected his father and loved him dearly – and, fortunately, he would not regret his choice. (He got nothing but straight A’s.) It is a story that makes Phelps the perfect example of how their might be good reasons to listen to one’s parents.

What is Edmund Phelps’ view on declining innovation?

The importance of Phelps’ work is obvious, whether it is his work on employment theory or the Golden Rule Savings Rate he established on the basis of Bob Solow’s research in Growth Theory. Oddly enough though, it seems he is not interested much in talking about his major contributions of the past. The most excited he is when asked about the things that matter to him today. What makes nations prosper? Why is there a decline in innovation in most of the Western countries? And how can we revive what he calls the people’s “innovative spirit”? These are the questions that keep him occupied, and they are not closely related to his early work.

When Phelps talks about countries being low on innovation, one cannot help but thinking: Don’t we live in a society where people are creating new things every day? There is Silicon Valley, after all. Phelps leans back in his chair, smiles as if the answer was too obvious: “Silicon Valley is just a rather small part of the economy”, he points out. “What happened is that innovations stopped in the heartland of the country.” And it is the working class people that are deeply connected to that heartland – and who have been suffering.

Silicon Valley is just a rather small part of the economy. What happened is that innovations stopped in the heartland of the country.

Why does Phelps say innovation must benefit the whole economy?

“It must be painful to earn a low income when to such an extent around you there’re people swimming in money”, Phelps argues. He makes it clear though that it is not by any means about material goods alone. “The government throws a lot of money around for food stamps, for public housing”, he explains. “But that’s no substitute for having a life.” What is it that’s missing then? Phelps can easily sum it up: meaningful work. He illustrates how all the money spent on welfare programs does not do anything to make the careers of the working poor more meaningful, more satisfying. “For jobs to be rewarding they have to engage people’s attention, engage their mind a little bit, make them care enough to go into work and put in a day’s work”, he continues.

What makes work meaningful, according to Edmund Phelps?

Phelps has written a book that can be regarded as some kind of late manifesto: Mass Flourishing. How Grassroots Innovation Created Jobs, Challenge, and Change. He takes his readers on a journey from the early 19th century, when prosperity was exploding in many countries, to the years after World War II, when Europe and the United States lost their former dynamism. A key element of his book is to show the connection between narrowed innovation and a decrease in job satisfaction, a loss of “good jobs” that offered ongoing challenges and the chance to imagine and create things.

For jobs to be rewarding they have to engage people's attention, engage their mind a little bit.

How does corporatism impact innovation and growth?

On his favorite page of the book, Phelps explains the need for every country to create an economy that is a “vast imaginarium”. There are probably a lot of ingredients necessary to make that possible, and Phelps admits how on different days he would blunder into one aspect rather than another. He does not claim to have found the perfect recipe yet, but he continues to discuss how economic stagnation might be stopped. His thoughts on this are led by what he has learned when studying philosophy. He remembers how impressed he was by David Hume. “He said there wouldn’t be any progress in the world if it weren’t for human creativity. I never lost sight of that thinking. People are not just learning and stumbling on things, they’re also imagining possibilities.”

One of his close friends is economist and Nobel laureate Joseph Stiglitz. They are both members of the Center on Capitalism and Society, which was founded by Phelps in 2002 to initiate new research on economic instability, inclusion and growth. Stiglitz emphasizes how they are on the same side when it comes to the question of declining dynamism: “The focal point of economic attention should be on what leads to a more dynamic economy and society and not just what leads to more static efficiency. And that’s what Ned’s work has been focusing on.”

If every job is protected, how can an innovator break into an industry with a new and better thing to produce?

A more dynamic economy for Phelps means preventing what he has called “corporatist maladies.” “If every job is protected”, he argues, “then how can an innovator break into an industry with a new and better thing to produce?” In order to find a way back to past dynamism, Phelps points to the need to make inroads into the established industries possible and to stop too much protection. One of his favorite examples to illustrate this: Europe. “European culture is very corporatist, there’s almost nothing that isn’t protected.”

“When I become pessimistic about America, I think about Europe and then I feel better about my country”, Phelps admits (though this might have changed in the meantime given that Donald Trump has been elected US president). There is a certain irony in his words, of course, since it is perfectly clear that Phelps worries about Europe’s future. Back in the 90s, he spent a lot of time in France and Italy. It was back then that he realized there was something wrong with the system: “I began to perceive that the youth were not feeling very involved, excited by their work.”

European culture is very corporatist, there’s almost nothing that isn’t protected.

Why does Edmund Phelps use Europe as a case study in stagnation?

Europe is in a bad shape. The Southern countries have been struggling for years, the United Kingdom wants to leave the European Union, populist voices are getting louder every day – and there is no productivity growth. Phelps emphasizes that “there’s never been a time when there was a greater need for good economists”.

Why is Phelps skeptical of expert-driven economic solutions?

Alright then, there are many good economists around the globe, let’s just hire a bunch of them to work out ideas that will make the economy a better place. Phelps laughs. “There would be tremendous warfare, a power struggle to see who can get control”, he assures. “It’s just totally naïve to think that the sciences are some sort of nirvana of selfless search for the truth.” Ok, so economists are only human after all. And there is, as usual, no easy answer to solve a wide-ranging problem. But still it is comforting to know that there are people like Phelps who are dealing with today’s important questions – even if they have a hard time finding an answer.

I’m trying to figure out what it’s like to be in the working poor and what they want in life.

What does Edmund Phelps propose for addressing economic hardship?

Viviana fondly remembers the week the couple spent in Stockholm for the Nobel ceremony in 2006. At the banquet, Phelps told the audience how he did not do his work for money or for prizes but for the excitement of it. One can easily imagine him having been a restless professor back in the days, eager to make a theoretical discovery. This might have changed a little in the meantime. “What I’m doing now isn’t exactly so much fun”, Phelps admits. “I’m trying to figure out what it’s like to be in the working poor and what they want in life and what satisfactions they’re getting.”

Does not sound too much fun indeed. But it has turned Phelps into a radical advocate of subsidies to low-wage jobs. He has frequently made the argument that low-wage employment subsidies would induce companies to hire more low wage-people and pull up their wage rates. Though this has not led to any meaningful programs in most countries yet, he will continue campaigning for those at society’s bottom. Edmund Phelps, caught somewhere between the claim for subsidies and an argument for deregulation. It is hard to tell where he is located on the political scale. But he would probably fight against a classification anyway.

There is no doubt that Edmund Phelps has led a fine life and that he is perfectly happy with where he is right now, whether he spends his days in New York, the city that is so dear to him, or traveling the whole world with his beloved wife always by his side. On his desk, there are still plenty of problems to work on. This will require a lot of creativity and imagination. But this is what economics involves. And it is the reason Edmund Phelps is not only a man of the arts – but of economics too.