Understanding of real work earns Nobel for professor

NEW YORK – The way Columbia University professor Edmund S. Phelps sees it, you can’t build good economic models to guide government policies if you don’t capture what real people do.

That’s what prompted him to take a fresh look in the 1960s at the prevailing “conventional wisdom” about unemployment, which was that the only way to reduce joblessness was to juice up the economy with an easy money policy or lower interest rates and accept inflation as the consequence.

Phelps felt the theory that there was a predictable trade-off between unemployment and inflation failed to take into account that real workers – and their bosses – have expectations about wages and prices that feed back into the system.

That research was honored Monday when the Royal Swedish Academy of Sciences named Phelps, 73, the winner of the 2006 Nobel Memorial Prize in Economic Sciences.

The academy, which announced the award in Stockholm, Sweden, said in its citation that “Phelps’ work has fundamentally altered our views on how the macroeconomy operates.”

Phelps, a Chicago native who has been the McVickar professor of political economy at Columbia since 1982, told reporters that workers and companies face difficult decisions and the process isn’t always neat.

“I’ve been interested in trying to put people in a more realistic way into our economic models,” Phelps said. “In particular I’ve emphasized that people have to form expectations about the current state of the world and also expectations about the future, including the consequences for the future of their actions in the present.”

He said this isn’t easy because people make decisions with incomplete information about the state of the world and how the economy works.

“It’s a great big mess, but I think the messiness was not sufficiently appreciated earlier,” he said.

In its citation, the academy said that Phelps had advanced the understanding of the trade-offs between full employment, stable pricing and rapid growth, all of which are the central goals of any sound economic policy.

It also pointed out that his research helped explain the high levels of inflation that prevailed in the 1970s and early 1980s.

Fellow economists praised the academy’s selection.

John B. Taylor, a professor of economics at Stanford University in California, who earlier worked on projects with Phelps at Columbia, called the award “a great honor … for a brilliant man who has made many contributions” to economics.

He noted that Phelps did his early work at a time when economists believed a government couldn’t lower unemployment without triggering inflation.

“He said, let’s look at the decisions the workers and the firms make,” Taylor said. “They’ll make their decisions on real factors – productivity, the state of demand in that market, things like that. So the overall inflation rate can be higher or lower, but there will be the same unemployment rate.”

Nariman Behravesh, an economist with Global Insight in suburban Boston and a former student of Phelps, said that more recently Phelps has been looking at how best to encourage the development of human capital.

“He believes that if you’re trying to get jobs for low-skilled workers, the way to do it is not to impose a minimum wage – which could have the perverse effect of reducing jobs,” Behravesh said. “But give a tax break for employers … and you can get these people into the work force and get them training that improves their human capital.”

Americans have swept all the Nobels announced so far this year, with Phelps being the sixth named for one of the prestigious awards. The economics prize carries an award of $1.4 million.

Two other Nobel prizes have yet to be announced – the winner of the prize for literature will be announced Thursday, followed by the Nobel Peace Prize on Friday.

Phelps was born in Chicago and earned his bachelor’s degree at Amherst College in Amherst, Mass., in 1955 and his Ph.D. at Yale University in 1959.

Phelps told reporters that he hadn’t expected the 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 said.

He planned to teach his Monday class at Columbia – and share some champagne with his colleagues.