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Edmund Phelps wins Economics Nobel

He has developed a new economic model that has helped balance inflation and unemployment in decision-making.

india Updated: Oct 09, 2006 21:17 IST

American Edmund S. Phelps has won the 2006 Nobel Memorial Prize in Economic Sciences on Monday for explaining the relationship between inflation and unemployment, work that has had a profound impact on macroeconomic policy.

The 73-year-old Columbia University professor challenged prevailing views in the 1960s by developing a new economic model that has helped corporate and government leaders balance inflation and unemployment in decision-making.

He is the sixth U.S. citizen to win a Nobel Prize this year, meaning every prize save for the literature and peace prizes, which have not yet been announced, have gone to Americans. Phelps told reporters in New York that he learned of the prize in a telephone call from Sweden shortly after 6 a.m. (1000 GMT). "I'm very happy," he said. "I waited for it a long time." In fact, Phelps said he wouldn't have been surprised if he hadn't gotten the Nobel award this year.

"I thought for a time I would get it in my 60s, then I thought I would get it in my 70s and, more recently, I've been thinking that I would get it in my 80s," he told reporters.

"I tried to put the people back into our economic model and in particular to take into account their expectations about what other economic actors are doing at the same time and in the future," he said.

Phelps is the first single winner of the prize since Canadian Robert A. Mundell, also of Columbia, won in 1999 for his analysis of monetary and fiscal policy under different exchange rate regimes. The Royal Swedish Academy of Sciences said Phelps' work, done in the late 1960s, had "deepened our understanding of the relation between short-run and long-run effects of economic policy." Phelps challenged the prevailing view in the 1960s that there was a stable, negative relationship between inflation and unemployment, illustrated by the so-called Phillips curve.

"He recognized that inflation does not only depend on unemployment, but also on the expectations of firms and employees about price and wage increases," the academy said. Phelps put together a new model to describe the relationship between inflation and unemployment, known as the

expectations-augmented Phillips curve.

"That idea has been accepted all over the world," prize committee member Bertil Holmlund said. "It has been a resounding success story.

The economist also showed that there is a precise equilibrium unemployment rate at which firms raise workers' wages at the same rate as average wages are expected to rise in the economy overall. Those findings have influenced central banks in their interest rate decisions, the academy said.

"Phelps' work has fundamentally altered our views on how the macroeconomy operates," the citation said, adding his work proved fruitful in understanding the causes of the increases in both inflation and unemployment during the 1970s.

Nariman Behravesh, chief economist with the Global Insight research and consulting firm in suburban Boston, said he had been a student of Phelps at the University of Pennsylvania and that he was delighted to see his teacher receive the prize for what he called "pioneering work."

Behravesh said that Phelps in the 1960s challenged the prevailing thought that there was a trade off between unemployment and inflation.

"He, along with Milton Friedman, argued that in the long run, that trade off doesn't exist," he said of the 1976 Nobel laureate. Behravesh said that Phelps' more-recent work has looked at alternatives for getting low-skilled workers into the economic system and has concluded that tax breaks for employers are more effective than increases in minimum wages.

Last year's winners were Robert J. Aumann, a citizen of Israel and the United States, and American Thomas C. Schelling, for their work in game-theory analysis.

Other winners have included Joseph E. Stiglitz and John Nash, about whom the Academy Award-winning film "A Beautiful Mind" was made.

The economics prize, worth 10 million kronor (euro1.1 million; US$1.4 million), is the only one of the awards not established in the will left by Swedish industrialist Alfred Nobel.

First Published: Oct 09, 2006 21:17 IST