By Freedom Newspapers
We were holding out, and we still are, for Gordon Tullock. He’s the economist who worked so closely with James Buchanan (who already has his Nobel) in the development of “public choice” economics, which put academic meat on the common-sense observation that government employees are guided by personal and institutional self-interest rather than some abstract, and largely undefinable concept called the “public interest.”
But Edmund Phelps of Columbia, who was awarded this year’s Nobel Prize in economics, will do until next year.
Phelps’ major contribution to economics seems to have been developing (in some papers with Milton Friedman, an early Nobel winner and a firm friend of freedom) a more sophisticated understanding of what economists call the Phillips curve. The Phillips curve posits that there is a close relationship between inflation and unemployment, and that the price of reducing unemployment — an acceptable one in the mind of Phillips, a 1930s Keynesian — is higher inflation.
Not so fast replied Phelps and Friedman. You might be able to reduce unemployment temporarily by pumping money into the economy, but the effect will diminish over time, if only because people come to expect it and discount in advance for it. The relationship between unemployment and inflation — as the “stagflation” of the 1970s demonstrated — is nowhere near so direct or simple.
Edmund Phelps has worked on the big questions in economics — unemployment, economic growth, labor markets, capital accumulation and the even larger question of whether free markets serve justice. His piece Tuesday in the Wall Street Journal offered two cheers for the more dynamic capitalist model of the United States as contrasted with the more controlled and static model that Western Europe has adopted.
As Tyler Cowen, a brilliant young economist at George Mason University, wrote on his blog Tuesday, “His major contributions were absorbed, and were standard fare, by the time I was a young’un.” There may not be a Phelpsian “school,” but he has had considerable influence on what young economists are taught as just plain economics.
Phelps did not make explicit what seems to us a major implication of his research — that if managing the economy is nowhere near so straightforward and simple as early Keynesian theorists thought, maybe government should stop trying to “manage” the economy. Indeed, in recent years Phelps has toyed with the idea of further tinkering, through a tax credit to employers for paying more to low-wage workers. But he brought deep scholarship to real-world questions and understands that the essentials of a free economy — free entry into and exit from markets, with decisions made by entrepreneurs rather than bureaucrats — lie at the heart of what has been successful in the West’s social model for the past several centuries.