Edmund S. Phelps

Bio: Edmund S. Phelps is an academic researcher from Columbia University. The author has contributed to research in topics: Unemployment & Real interest rate. The author has an hindex of 56, co-authored 271 publications receiving 20660 citations. Previous affiliations of Edmund S. Phelps include New York University & Singapore Management University.

Investment in humans, technological diffusion and economic growth

Abstract: Most economic theorists have embraced the principle that certain kinds of education—the three R's, vocational training, and higher education—equip a man to perform certain jobs or functions, or enable a man to perform a given function more effectively. The principle seems a sound one. Underlying it, perhaps, is the theory that education enhances one's ability to receive, decode, and understand information, and that information processing and interpretation is important for performing or learning to perform many jobs. This chapter focuses on the economic growth theory, which has concentrated on the role of education as it relates to the completely routinized job. In its usual, rather general form, the theory postulates a production function which states how maximum current output depends upon the current services of tangible capital goods, the current number of men performing each of these jobs, the current educational attainments of each of these jobholders and time.

The Statistical Theory of Racism and Sexism.

Abstract: My recent book, Inflation Policy and Unemployment Theory, introduces what is called the statistical theory of racial (and sexual) discrimination in the labor market.' The theory fell naturally out of the non-Walrasian treatment there of the labor "market" as operating imperfectly because of the scarcity of information about the existence and characteristics of workers and jobs. A paradigm for the theory is the traveller in a strange town faced with choosing between dinner at the hotel and dinner somewhere in the town. If he makes it a rule to dine outside the hotel without any prior investigation, he is said to be discriminating against the hotel. Though there will be instances where the hotel cuisine would have been preferable, the rule represents rational behavior it maximizes expected utilityif the cost of acquiring evaluations of restaurants is sufficiently high and if the hotel restaurant is believed to be inferior at least half the time. In the same way, the employer who seeks to maximize expected profit will discriminate against blacks or women if he believes them to be less qualified, reliable, long-term, etc. on the average than whites and men, respectively, and if the cost of gaining information about the individual applicants is excessive. Skin color or sex is taken as a proxy for relevant data not sampled. The a priori belief in the probable preferability of a white or a male over a black or female candidate who is not known to differ in other respects might stem from the employer's previous statistical experience with the two groups (members from the less favored groups might have been, and continue to be, hired at less favorable terms); or it might stem from prevailing sociological beliefs that blacks and women grow up disadvantaged due to racial hostility or at least prejudices toward them in the society (in which latter case the discrimination is self-perpetuating). The theory is applicable to the class of "liberal" employers and workers who have no distaste for hiring and working alongside black or female workers. By contrast, the theory of discrimination originated by Gary Becker is based on the factor of racial taste. The pioneering work of Gunnar Myrdal et al. also appears to center on racial (and, in an appendix, sexual) antagonism. Some indications of interest in the new theory, and the independent discovery of the same statistical theoryby Kenneth Arrow, convince me that it is time for a formalization of the theory in terms of an exact statistical model. Though what follows is very simple, it may be useful to those who like exact models and it may stimulate others to develop the theory further. An employer samples from a population of job applicants. The employer is able to measure the performance of each applicant in some kind of test, yi, which, after suitable scaling, may be said to measure the applicant's promise or degree of qualification, qi, plus an error term, ps.

On Second-Best National Saving and Game-Equilibrium Growth

Abstract: This chapter highlights the question whether second-best saving is greater or smaller than first-best saving when given future saving is non-optimal from the standpoint of the present generation. The chapter presents the postulation that all generations expect each succeeding generation to choose the saving ratio that is second-best in its eyes. This somewhat game-theoretic model leads to the concept of an equilibrium sequence of saving-income ratios having the property that no generation acting alone can do better and all generations act so as to warrant the expectations of the future saving ratios. The chapter presents a comparison of this equilibrium and the first-best optimum. The concept and calculation of the second-best optimum is of interest even if that analysis does not explain actual national saving because society as a whole has no notion of such an optimum.

Money-wage dynamics and labor-market equilibrium

Abstract: This chapter discusses money-wage dynamics and labor-market equilibrium. A generalized excess-demand theory of the rate of change of the average money-wage rate has been developed for frictional labor markets that allocate heterogeneous jobs and workers without having perfect information and market clearance by auction. There are two explanatory variables: the vacancy rate and the unemployment rate. The unemployment rate and the rate of change of employment are shown to be joint proxies for the vacancy rate. Hence, generalized excess demand can be regarded as a derived function of the unemployment rate and the rate of change of employment. This relationship is the augmented Phillips curve. Some of its properties are deduced. Equilibrium entails equality between the actual and expected rates of wage change. The steady-state equilibrium locus is implied to be a vertical line at a unique steady-state equilibrium unemployment rate. This is consistent with the usual theory of anticipated inflation. But if there are downward money-wage rigidities, then, up to a point, every one percentage point increase of the expected rate of wage change produces less than a one percentage point increase of the actual rate of wage change. The steady-state equilibrium locus will then have the characteristic negative slope of the Phillips curve in the range of large unemployment rates. But at sufficiently small unemployment rates, equilibrium is impossible and under the adaptive expectations theory, an explosive hyperinflation will result.

Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time: Reply

Abstract: Readers of my article on optimal inflation over time1 will recognize its principal theme to be the following. Among all alternative equilibrium states of steady anticipated inflation or deflation, all with the same steady unemployment rate, there exists a state with an algebraic anticipated inflation rate that is "statically optimal". But, by virtue of the immediate postulated gains from over-employment-from employment in excess of the equilibrium level-and the immediate postulated losses from under-employment, social time preference plays a critical role in determining each day's optimal level of aggregate demand and thereby the ultimate steady rate of algebraic inflation that society will asymptotically settle for. The higher the rate of time preference, the more does this asymptotic algebraic inflation rate exceed the statically optimal inflation rate and the greater is the present optimal level of aggregate demand. If the current "expected rate of inflation" exceeds the asymptotic rate of algebraic inflation, then the optimal aggregate demand policy will produce transient (vanishing) underemployment and thus a rate of inflation below expectations. If the current expected rate of inflation is below the asymptotic rate of algebraic inflation, then the optimal fiscal policy aims for transient overemployment and algebraic inflation in excess of expectations. It is odd that Mr. Williamson, in his Comment, 2 should find a "deflationist moral" in this even-handed theme. My article rejected the conventional approach to the choice of aggregate demand, which takes expectations as exogenous or irrelevant, not any conventional conclusion about the merits of inflationary policies. One conclusion of the model is that a society with the requisite time preference can rationally opt for over-employment, unexpectedly high inflation and its aftermath of high steady inflation in the eventual future equilibrium. Even the statically optimal rate of algebraic inflation-in my formulation this is the maximum rate of algebraic inflation consistent with "full liquidity" or "monetary efficiency"-might be one of mild inflation if the real rate of interest is small enough. The interesting variation on this dynamic model that Williamson proposes would, loosely speaking, make more deflation worse than less deflation on the "other side" of the static optimum. There are

Increasing Returns and Long-Run Growth

Abstract: This paper presents a fully specified model of long-run growth in which knowledge is assumed to be an input in production that has increasing marginal productivity. It is essentially a competitive equilibrium model with endogenous technological change. In contrast to models based on diminishing returns, growth rates can be increasing over time, the effects of small disturbances can be amplified by the actions of private agents, and large countries may always grow faster than small countries. Long-run evidence is offered in support of the empirical relevance of these possibilities.

Economic Growth in a Cross Section of Countries

Abstract: For 98 countries in the period 1960–1985, the growth rate of real per capita GDP is positively related to initial human capital (proxied by 1960 school-enrollment rates) and negatively related to the initial (1960) level of real per capita GDP. Countries with higher human capital also have lower fertility rates and higher ratios of physical investment to GDP. Growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment. Growth rates are positively related to measures of political stability and inversely related to a proxy for market distortions.

Rules Rather than Discretion: The Inconsistency of Optimal Plans

Abstract: Even if there is an agreed-upon, fixed social objective function and policymakers know the timing and magnitude of the effects of their actions, discretionary policy, namely, the selection of that decision which is best, given the current situation and a correct evaluation of the end-of-period position, does not result in the social objective function being maximized. The reason for this apparent paradox is that economic planning is not a game against nature but, rather, a game against rational economic agents. We conclude that there is no way control theory can be made applicable to economic planning when expectations are rational.

Golden Eggs and Hyperbolic Discounting

Abstract: Hyperbolic discount functions induce dynamically inconsistent preferences, implying a motive for consumers to constrain their own future choices. This paper analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology: an illiquid asset whose sale must be initiated one period before the sale proceeds are received. The model predicts that consumption tracks income, and the model explains why consumers have asset-specific marginal propensities to consume. The model suggests that financial innovation may have caused the ongoing decline in U. S. savings rates, since financial innovation in- creases liquidity, eliminating commitment opportunities. Finally, the model implies that financial market innovation may reduce welfare by providing “too much” liquidity.