Nobel-winning economist Edmund Phelps reshaped modern thinking on inflation

The Nobel laureate's work on inflation expectations and unemployment transformed economic policymaking and influenced central banks around the world

By Chris Kornelis

 

Edmund S Phelps, who was awarded the Nobel in economic science in 2006 for work that helped upend the conventional wisdom about the balance of inflation and unemployment, inspiring central banks to push for low inflation, died on Friday at his home in Manhattan. He was 92.

 

His wife, Viviana Phelps, said the cause was Alzheimer's disease.

 

In a landmark 1968 paper, “Money-Wage Dynamics and Labor-Market Equilibrium”, Phelps argued for a complex view on inflation. He agreed that stoking the economy to keep inflation up might help keep unemployment down in the short term. But to do so over the long term, he wrote, economic stimulus would have to keep growing, and inflation would keep rising too.

 

 

Phelps's paper also introduced the idea that some amount of unemployment is necessary in a healthy economy; he called it the equilibrium unemployment rate.

 

Central to these ideas was Phelps's contention that expectations about inflation, particularly among businesses, had an important effect on inflation itself.

 

“Whether you have high inflation or not depends largely upon whether expectations of inflation are acting upon the players,” Phelps said in an interview with The New York Times in 2023.

 

When it awarded Phelps the Nobel Memorial Prize in Economic Sciences, the Royal Swedish Academy of Sciences wrote: “Phelps showed how the possibilities of stabilisation policy in the future depend on today's policy decisions: Low inflation today leads to expectations of low inflation also in the future, thereby facilitating future policymaking.”

 

Dr Phelps came to many of the same conclusions, at around the same time, as another Nobel recipient, Milton Friedman, one of the most famous and polarising American economists of the 20th century. Jason Furman, a professor of economic policy at Harvard who served as chairman of the Council of Economic Advisers in the Obama administration, said in an interview with The Times that Phelps's message was more generally accepted than Friedman's because he was not considered the kind of partisan conservative figure that Friedman was.

 

Edmund Strother Phelps was born in Evanston, Illinois, on July 26, 1933, to Edmund and Florence (Stone) Phelps. His mother was a nutritionist, and his father worked in advertising at a Chicago bank.

 

When he was six, his family moved to the Westchester suburbs of New York after his father found work in advertising and sales in the city. An avid music fan, young Edmund played the trumpet as a child and into his college years.

 

As an undergraduate at Amherst College, he was considering majoring in philosophy when his father suggested that he might enjoy an economics course. He was immediately taken with the field. After graduating from Amherst in 1955, he started graduate school at Yale, driven in part by a desire to bridge what he saw as a disconnect between macroeconomics and microeconomics in textbooks.

 

He received a PhD from Yale in 1959. After a year at the RAND Corporation, he took a research and teaching position at Yale's Cowles Foundation. He gained attention for a 1961 paper, “The Golden Rule of Accumulation: A Fable for Growthmen”.

 

“If you want to get on that highest consumption path in the long run, you don't want to save too little,” Phelps said, because “then you'll never get there”.

 

Phelps wrote, edited or contributed to more than two dozen books, including “Political Economy: An Introductory Text” (1985) and “Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change” (2013). He wrote widely on a variety of ideas in economics not confined to any one ideological corner.

 

In 2024, he was one of a group of 16 Nobel laureates who signed a letter during the presidential campaign warning of the effects — including reignited inflation — of the economic policies in a second Trump term. Phelps said he did not go out of his way to avoid being branded a liberal or conservative. Rather, he tried to call it as he saw it.