Columbia Professor Phelps wins Nobel Prize in Economics

NEW YORK - Columbia University's Edmund Phelps, 73, won the Nobel Prize in Economics last week for debunking the notion that inflation and unemployment are inversely related.

Mr Phelps was commended by the prize committee for work he undertook in the 1960s, a time in which the majority of economists subscribed to a theory embodied by the Phillips curve, which describes a tradeoff between inflation and unemployment. Before Mr. Phelps's theories took hold, policy makers, guided by the Phillips curve, operated under the assumption that they must choose between inflation and unemployment. "The work of Edmund Phelps has deepened our understanding of the relation between short-term and long-run effects of economic policy," the committee said yesterday in a statement.

The Nobel Committee went on to laud Mr. Phelps for his impact on economic research and policy.

Mr. Phelps demonstrated in a series of articles published in the late 1960s and 1970 that unemployment could not be reduced or held down by inflating prices.

He introduced the concept of "expectations" into the conversation about inflation, arguing that he expected rates of inflation and unemployment play an important role in determining what future inflation and unemployment rates will be: that is, high expected rates of inflation contribute to high inflation.

Milton Friedman, a 1976 Nobel recipient and renowned capitalist theorist, advanced a similar theory.

Mr. Phelps contended that the inflation and unemployment rates at any given time are the primary determinant of "expected" inflation and unemployment rates and that, as a result, inflating prices in the short term would make it difficult to reduce inflation in the long term.

"He clarified to monetary policy makers what they needed to do to reduce inflation, which was very high," said an economist and professor at Stanford University, John Taylor. "The work he did in the late 60s helped people understand why inflation came and what they needed to do to get rid of it. The concept that higher inflation would bring about lower unemployment prevented people from taking action against inflation. He showed that if you reduce inflation unemployment won't rise, and eventually people recognized this."

Mr. Phelps's work came at a time when the country suffered from crippling inflation rates.The decade of the 1970s is known among economists as "The Great Inflation" because the inflation rate regularly hovered above 10%, compared to today's rate of about 4%. The "stagflation" phenomenon of the 1970s, which saw high rates of both inflation and unemployment, helped to prove Mr. Phelps's theories correct.

Mr. Taylor said that Paul Volcker and Alan Greenspan, former chairmen of the Federal Reserve, helped to put Mr. Phelps's theories into practice. While it is impossible to discern their motivations, "it's clear that the Phelps work was influential in the decisions," he said.

Mr. Friedman, who used to teach at the University of Chicago, said that he and Mr. Phelps had very similar views on inflation and unemployment but that he had never collaborated with Mr. Phelps. "In the 1960s, both of us independently produced essentially the same argument about the Phillips curve," Mr. Friedman told The New York Sun. "Both Phelps and I argued that the Phillips curve assumed that workers never looked at what was going to happen and never made estimates about the future." Mr. Friedman said that artificially inflating wages to reduce unemployment might work temporarily, but that workers will react when they realize their wages are being inflated.

The Nobel committee's move today will boost the stature of Columbia's highly regarded economics department, which boasts economic superstars Jagdish Baghwati and Joseph Stiglitz, among others. Today Mr. Phelps, who teaches classes on macroeconomic theory and world economic problems, became the fourth Nobel laureate on the department's faculty.

Mr. Baghwati said that Mr. Phelps's receipt of the award is a big event for the economics department. "This is a major thing for the economics department because it's the fourth Nobel we've gotten in 10 years. It's a big shot in the arm," Mr. Baghwati told the Sun. He said that Mr. Phelps went on the short list to receive the award about 10 years ago, but added, "these things always come out of the blue."

Both Mr. Baghwati and the chairwoman of the university's economics department, Janet Currie, emphasized that although this is a joyful moment, the department's focus remains on recruiting and fostering young professorial talent. "Science belongs to the young people," Mr. Baghwati said. Ms. Currie said that the department is "trying to recruit the next Phelps," but recognized that "this will certainly help us by adding luster and excitement to the department… Everyone in academia is always looking to the next big thing."

With four Nobel winners, Columbia's economics department now matches the University of Chicago's, which until today claimed the most Nobel Prize winners among its economics professors. Asked how much this will boost Columbia's stature in the world of economics, Mr. Taylor said, "Nobel prizes always give recognition for work that people outside of universities can assess, but [Phelps] was a good economist before the Nobel Prize and he'll be good after."

"There's no doubt that Chicago has the premier spot," Mr. Friedman said. "But that's of course a biased assessment."