Edmund Phelps is the McVickar Professor of Political Economy at Columbia University, Director of Columbia’s Center on Capitalism and Society and the winner of the 2006 Nobel Prize for Economics.
He served as Senior Advisor to the project Italy in Europe at the Consiglio Nazionale delle Ricerche, Italy, for three years until 2000. He was a member of the International Panel on Economic Policy of the OFCE in Paris in the 1990s, and co-organiser of the annual Villa Mondragone seminar of the University of Rome ‘Tor Vergata’ from 1990 to 2000. He was a charter member of the Economic Advisory council of the EBRD and wrote most of the Annual Economic Outlook, which appeared in September 1993. He has been a consultant at the U.S. Treasury Department, U.S. Senate Finance Committee, and Federal Reserve Board.
During the last 40 years he has published extensively in professional journals. His recent books include “Structural Slumps: The Modern Equilibrium Theory of Employment, Interest and Assets” and “Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise” (both Harvard University Press).
In 2008 he was named Chevalier of the Legion of Honor, won the Premio Pico della Mirandola for humanism and the Kiel Global Economy Prize.
Alongside his interest in the functioning and performance of capitalist institutions, Phelps has also done research on the causes and cures of joblessness and low wages among disadvantaged workers.
In this book, Nobel Prize-winning economist Edmund Phelps draws on a lifetime of thinking to make a sweeping new argument about what makes nations prosper―and why the sources of that prosperity are under threat today. Why did prosperity explode in some nations between the 1820s and 1960s, creating not just unprecedented material wealth but “flourishing”―meaningful work, self-expression, and personal growth for more people than ever before? Phelps makes the case that the wellspring of this flourishing was modern values such as the desire to create, explore, and meet challenges. These values fueled the grassroots dynamism that was necessary for widespread, indigenous innovation. Most innovation wasn’t driven by a few isolated visionaries like Henry Ford; rather, it was driven by millions of people empowered to think of, develop, and market innumerable new products and processes, and improvements to existing ones. Mass flourishing―a combination of material well-being and the “good life” in a broader sense―was created by this mass innovation.
Yet indigenous innovation and flourishing weakened decades ago. In America, evidence indicates that innovation and job satisfaction have decreased since the late 1960s, while postwar Europe has never recaptured its former dynamism. The reason, Phelps argues, is that the modern values underlying the modern economy are under threat by a resurgence of traditional, corporatist values that put the community and state over the individual. The ultimate fate of modern values is now the most pressing question for the West: will Western nations recommit themselves to modernity, grassroots dynamism, indigenous innovation, and widespread personal fulfillment, or will we go on with a narrowed innovation that limits flourishing to a few?
Dissatisfied with the explanations of the business cycle provided by the Keynesian, monetarist, New Keynesian, and real business cycle schools, Edmund Phelps has developed from various existing strands-some modern and some classical--a radically different theory to account for the long periods of unemployment that have dogged the economies of the United States and Western Europe since the early 1970s. Phelps sees secular shifts and long swings of the unemployment rate as structural in nature. That is, they are typically the result of movements in the natural rate of unemployment (to which the equilibrium path is always tending) rather than of long-persisting deviations around a natural rate itself impervious to changing structure. What has been lacking is a "structuralist" theory of how the natural rate is disturbed by real demand and supply shocks, foreign and domestic, and the adjustments they set in motion.
To study the determination of the natural rate path, Phelps constructs three stylized general equilibrium models, each one built around a distinct kind of asset in which firms invest and which is important for the hiring decision. An element of these models is the modern economics of the labor market whereby firms, in seeking to dampen their employees' propensities to quit and shirk, drive wages above market-clearing levels-the phenomenon of the "incentive wage"--and so generate involuntary unemployment in labor-market equilibrium. Another element is the capital market, where interest rates are disturbed by demand and supply shocks such as shifts in profitability, thrift, productivity, and the rate of technical progress and population increase. A general-equilibrium analysis shows how various real shocks, operating through interest rates upon the demand for employees and through the propensity to quit and shirk upon the incentive wage, act upon the natural rate (and thus equilibrium path).
In an econometric and historical section, the new theory of economic activity is submitted to certain empirical tests against global postwar data. In the final section the author draws from the theory some suggestions for government policy measures that would best serve to combat structural slumps.
The focus, in common with other such texts, is on political economy. Economics arose in response to questions of political interest about national economy; and though economics has since found other applications as well, its vitality and development continue to stem from this central concern. The causes and effects of the way society organizes and regulates its economy-and the resulting debates over instability, inequality, joblessness, inflation, organizational incentives, and the rest-are main stuff of economics from here to China
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