My Journeys in Economic Theory by Edmund Phelps

Author:Edmund Phelps
Language: eng
Format: epub, pdf
Tags: BIO026000, Biography & Autobiography/Personal Memoirs, BUS039000, Business & Economics/Economics/Macroeconomics
Publisher: Columbia University Press
Published: 2023-05-16T00:00:00+00:00

Structural Mechanisms Behind Unemployment Rates

With the approach of the 1990s, I was drawn back to macroeconomics. The draw was not only the “slump in Europe”—not explained by the Keynes–Hicks closed-economy model nor by the Keynesian Mundell–Fleming open-economy model.7 I felt that there was a whole world of nonmonetary forces—structural shifts and changes in real conditions—acting on the path of the unemployment rate but not through aggregate demand. It was time to widen our perspective on macroeconomic activity.

I had never doubted and don’t doubt now the huge truth in the Keynesian thesis: A cut of aggregate demand acts to push unemployment up and a lift of aggregate demand acts to pull unemployment down, other things constant—ceteris paribus, as the Romans would have said. Far from having ever denied the plausibility of Keynesian theory, I had contributed a micro-theoretical underpinning to it: When aggregate demand falls, a typical firm would not risk making a cut in its wage scales in the absence of information on whether its competitors in its labor market were going to cut their wages—a situation that came to be called “imperfect information.” (Keynes had merely appealed to the downward “stickiness” of money wages and the upward stickiness of money prices.8) If I had not approved of all of the policy proposals promoted in part on the ground that they would stimulate “demand,” then it was not that I had become a skeptic about the possibility of deficient demand. (Keynes himself seemed to have become agitated by policy proposals that proponents had apparently sought to defend on Keynesian grounds—proposals that Keynes did not subscribe to. In the last months of his life, he wrote in the June 1946 Economic Journal of “modernist stuff gone wrong and turned sour and silly.”9)

Throughout the 1970s and 1980s, I had continued to regard that micro-macro work of mine as my peak—the most important of my papers up to that time. (My customer market paper with Sid Winter and my optimal saving paper with Bob Pollak, from the 1960s, also became important.) But no matter how important they were, nothing in these papers required a great deal of theoretical imagination—an exercise of real creativity. They presented a few new observations and insights on a nation’s economy, which was most gratifying. But they presented no new big picture of a nation’s economy, such as those conceived by Léon Walras, Eugen von Böhm-Bawerk, Joseph Schumpeter, Knut Wicksell, Frank Knight, Frank Ramsey, and Keynes. Economists used to conceive a new view of the economy—to add to the others or to displace some of them. (I can’t help commenting that these figures were not ancients: My teacher William Fellner clearly studied Böhm-Bawerk, my friend Paul Samuelson was Schumpeter’s student, and George Stigler, who knew me and my work, was Knight’s student.)

In the dawning of the 1990s, however, I made what felt like a pretty big step—developing a structuralist view standing in contrast to the Keynesian view—while not doubting that we can take both views. The slump in Europe

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