Nobel for Edmund Phelps

The 2006 Nobel Prize in economics was awarded to Edmund Phelps of Columbia University.  Tyler Cowen over at Marginal Revolution has a very nice discussion of Phelps's contributions to the microfoundations of macroeconomics (see here).  However, much of his work, as was the work of Robert Clower and Axel Leijonhufvud on coordination Keynesianism, was subsequently pushed aside in the rational expectations revolution of economics in the late 1970s and early 1980s.  The awarding of the prize to Phelps is not completely surprising, but I would say it is mildly surprising.

I served on a doctoral dissertation committee with Phelps when I taught at NYU.  He co-chaired the committee with my colleague Roman Frydman, and the student was Michael Goldberg (now of Univesity of New Hampshire).  Phelps and Frydman had resisted the Lucas revolution of a strict interpretation of rational expectations, and offered instead a notion of "theory consistent expectations" and the dymanic market process—as opposed to equilibrium economics.

For Austrian economists these two developments represented interesting choices.  When Lucas started his assault on Keynes and insisted that an equilibrium theory of the business cycle be erected in place of Keynesian theory he took inspiration from Hayek.  Lucas's island model in which the noise between relative prices and price level changes cause economic distortions was his explicit attempt to formally render Hayek's business cycle theory from the 1930s.  Similarly, Frydman's work on theory consistent expectations and the market process drew inspiration from Hayek's work on the coordination of economic activities.  The main macroeconomists in the Austrian tradition at the time—Gerald O'Driscoll and Roger Garrison—choose to emphasize the critical differences between the Austrian approach to macroeconomics and these post Keynes developments in the 1970s and 1980s.  Neither Lucas/Sargent nor Clower/Leijonhufvud nor Phelps/Frydman became the critical allies for theory advancement that perhaps they could have.  Personally, I have always found the Clower/Leijonhufvud work the most compelling of this bunch, but then again I am not a macro economist.

Anyway, as subsequent developments in economic theory passed Phelps by, he and Frydman continued their work.  The work with Goldberg, for example, is in the field of international money and the impact of theory consistent expectations in explaining exchange rate movements.  But as the countries of East and Central Europe started to undergo their fundamental reforms in the late 1980s, Phelps and Frydman turned their attention to that question—especially Roman Frydman who led a major research project documenting the various privatization programs that arose in the different countries.  But Phelps became preoccupied with the "bigger" questions about the nature of capitalism.  In recent years, he has started a new research Center at Columbia devoted to the study of capitalism and even launched a new journal, Capitalism and Society.  In the most recent issue, he has an article "Understanding the Great Changes in the World: Gaining and Losing Ground Since World War II" which lays out his perspective on economics and public policy.  Ironcially for the narrative that I just told about the debate over the microfoundations of macroeconomics in the 1970s and 1980s, Axel Leijonhufvud provides a comment on Phelps's essay.

Anyway, I am pleased for Ned.  I wish the Nobel Prize committee would have been as thoughtful as Ned's own journal and given a nod to Axel as well.  That way the full array of alternatives to traditional Keynesian macroeconomics would have been awarded—pre-Keynesian (Hayek), adaptive expectations and monetarism (Friedman), critique of functional finance (Buchanan), rational expectations and New Classical economics (Lucas), theory consistent expectations and the long run natural rate (Phelps), and the coordination Keynesianism and the Wicksellian connection (Leijonhufvud).

Comments

[Rafe]

A highly critical Austrian take on Phelps.

http://www.mises.org/story/2351