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Edmund “Ned” Phelps, the man who helped explain why inflation expectations are crucial to macroeconomic stability, died last week at the age of 92.
In the late 1960s, Phelps wrote two groundbreaking articles which contained the work for which he would later be awarded the 2006 Nobel Prize for Economics.
The breakthrough in the first, published in the journal Economica in 1967, highlighted the role of people’s expectations in setting wages and prices. Phelps argued that if people expected higher inflation, workers would ask for higher wages and managers would raise their prices. The result would be a wage-price spiral.
In such a scenario, Phelps insisted, the best policy for the monetary authorities would be to bring those expectations down, even if it meant raising interest rates at the expense — at least temporarily — of jobs.
The second paper, published in the Journal of Political Economy in 1968, argued that attempts by central banks to maintain employment above its equilibrium level would end in an inflationary upsurge.
Orthodox Keynesians had thought that higher inflation was a price worth paying for lower unemployment. But this idea was abandoned after the experience with high and unstable inflation in the 1970s and early 1980s.
Phelps could consider himself vindicated. As he noted in his Nobel address, his 1967 paper was the intellectual ancestor of the inflation targeting that guides central banking to this day. As he put it: “Inflation will still be capable of ups and downs, but it cannot go far if the expected inflation rate is under control.”
The faith in central bankers’ capacity to keep inflation expectations under control is widely considered to have enabled them to steer the global economy towards a soft landing after the Covid-19 pandemic.
Born in Evanston, Illinois in 1933, Phelps grew up in Hastings-on-Hudson, New York, where he played lead trumpet in his high school band. He went on to attend Amherst, where he focused on humanities before turning to economics. He did his PhD at Yale, where he came under the tutelage of James Tobin, an intellectual leader of American Keynesians and a Nobel laureate.
Phelps researched and taught at Yale until 1966. He then moved to the University of Pennsylvania, where he wrote the papers that made him famous. He moved to Columbia University in the summer of 1971, where he met his future wife Viviana Montdor. They married in 1974.
The contributions by Phelps came at around the same time Milton Friedman was establishing the concept of a “natural rate of unemployment”. But Phelps was not awarded the Nobel Prize until 2006 — weeks after the death of Friedman, who had become a laureate 30 years earlier.
Harvard University’s Kenneth Rogoff, a former chief economist of the IMF, told the FT that “Phelps, along with Friedman, argued that central banks can largely dictate long-run inflation but have little control over long-run average output growth. Modern-day research has qualified these results in some important dimensions but they remain a core starting point for discussion.”
Olivier Blanchard, also a former chief economist of the IMF, adds that “his style was highly idiosyncratic . . . He did not listen much to others, pursuing his agenda with focus and passion.”
Prior to his seminal contributions to macroeconomics, Phelps published papers on the “Golden Rule” of capital formation. The aim, he said, should be to maximise what economists call “steady-state” consumption per head. To achieve this, the savings rate should equal the share of income going to capital.
Phelps was committed to understanding the social, political and philosophical context for markets. In 1997, he published the book Rewarding Work, in which he argued for wage subsidies as a way of ensuring that prosperity could be better shared.
He was founding director of the Center for Capitalism and Society at Columbia, from 2001 to its closure in 2024. In 2013 he published the book Mass Flourishing, a statement of his belief that “modern values” — a shared desire to create, explore and meet challenges — were the wellsprings of economic dynamism, but were being lost.
“That he remained so engaged in thinking, writing and debating till so late in life — another parallel to Friedman — is an inspiration to all of us in the profession,” says Raghuram Rajan of the University of Chicago.
