Interview with the 2006 Laureate in Economics, Edmund S. Phelps, 6 December 2006. 

Professor Edmund Phelps, who is the prize winner in economics this year, the Riksbank Prize in Economics in memory of Alfred Nobel. Welcome to Stockholm firstly.

Edmund Phelps: Thank you.

How long have you been spending in Stockholm so far?

Edmund Phelps: I think this is our third or fourth day. My wife and I got here on Sunday evening.

What have you been doing with that time?

Edmund Phelps: Preparing for the prize lecture on Friday and other smaller things that are coming up.

OK. Has there been any fun involved at all?

Edmund Phelps: It’s been fun meeting all these wonderful people and the city is very beautiful. What’s not to like?

Despite winter?

Edmund Phelps: Right. Despite winter.

The lecture that you just mentioned which you’ll be delivering on Friday, do you want to give us the title of the lecture now – a little sneak preview into what it’s going to be about perhaps?

Edmund Phelps: If I can remember it. It’s Macro Economics for a Modern Economy.

OK. Macro Economics for a Modern Economy. That sounds terribly exciting. I, for one, am going to be very keen to listen to it and I think our politicians in Sweden are going to be very keen to listen to it as well.

Edmund Phelps: Good. Great.

But that’s something I’d like to come back to. You are attached to Columbia University. You are probably one of 15 or 16 Nobel Prize winners at the university and probably the fourth one in economic sciences. Is there any internal competition at the university itself between yourselves and the physicists, because it seems like you’re catching up with them right now?

Edmund Phelps: No, I don’t think anybody feels competitive in that way. Economists never think about physicists and I’m sure that physicists never think about economists.

But, seriously, every one of them thinks about Nobel Prizes don’t they?

Edmund Phelps: Yes, everybody thinks about Nobel Prizes night and day – or day anyway.

Is that how you would describe how you’ve been thinking about it?

Edmund Phelps: It began to weigh on my mind about a dozen years ago and I was thinking it would come, but it didn’t come and it didn’t come and it didn’t come. And then, sure enough, it came.

Here it is. How has your perception changed about the Nobel Prizes? How did you perceive them before you were a winner and how has that perception changed now since you’ve actually won one.

Edmund Phelps: I have to say in all honesty I was quite impressed by the carefulness with which the nominating committee prepared its case. They did a beautiful job with a three- or four-page statement for the press, a somewhat longer statement in the way of an official citation and then a 30 page long discussion of my work in great detail. I was very impressed by that.

And you recognised you in all of it?

Edmund Phelps: Oh, it was me.

If you had to describe it in your own words – there are several things that you’ve been awarded for – if you were to describe it in your own words, what do you think is the most meaningful thing that you’ve brought to the study of macroeconomics and to policy making?

Edmund Phelps: I’ve worked in two or three different areas, but in the area of employment and unemployment and fluctuations, that kind of thing, what I think I did was I brought expectations into the analysis of price setting and wage setting which led to new light on cost inflation, the difficulties of disinflation. I also introduced into wage setting something called “incentive wages” – that’s what I called it – incentive wages. That proved to be quite important because the idea was that each firm is trying to pay a better wage than the other firms in order to reduce the quit rate among its employees, but as they all try to get an advantage over one another they just end up the industry standard pay scales so that labour becomes more expensive for all of them and as a result employment falls and unemployment is created.

Where typically do you see these phenomena? Is it just industrialised countries or would you say that there is relevance for it all over the world?

Edmund Phelps: It’s pretty relevant all over the world. Even in less developed countries you see zillions of people queued up at the post office for some jobs there or you see people waiting at the factory gates. They can’t knock on the door and bid down wage rates in order to get themselves one of the jobs. The firm is not interested in paying less wages; it likes wages high.

In terms of arriving at your theories and doing your research, how much of impact have other Nobel Prize winners – specifically within your department at Columbia University – how much of how you think has been formed by what they think? How much of discussion is there?

Edmund Phelps: Actually we don’t see each other very much.

You don’t?

Edmund Phelps: No, we’re all at airports and in airplanes and teaching classes and running around, so there isn’t very much opportunity for interchange. Also in this age of the internet you’re emailing everybody all the time, including people down the hallway.

And here I was thinking that you were having coffee in the coffee room with Joseph Stiglitz …

Edmund Phelps: No, those days are gone.

But they used to be?

Edmund Phelps: Yes, it used to be the case.

Perhaps we can touch on that, then, maybe that’s where we can lead into this thing that I’ve been wondering about as how educational institutions and how students as well have changed over the years since you were a young student.

Edmund Phelps: When I was a student we entered graduate school knowing not only very little economics but we also had a dreadfully poor background in mathematics. Most of us had never studied history either – knew nothing of psychology. We were just practically clean slates as we entered. But I guess what we had going for us is some pretty deep curiosity about the subject and maybe there was some part of it that we wanted to pursue in depth. Maybe we were more seekers and discoverers than today’s graduate students are.

Because they’re so prepared?

Edmund Phelps: Yes, but they do arrive with a dozen math courses under their belt. They come extremely well equipped. I’m just not sure that they come with the same inspiration or the same drive that we had then.

Would you say that the past bred a few more visionaries than today’s educational system is going to? Is that an assumption that we can make?

Edmund Phelps: I’m not sure about that, but if I had to bet which way it was I would say it was that way, that the visionary quotient was higher in the old days.

How would you try to instil curiosity in your students, for example? How do you do it?

Edmund Phelps: I guess by being a very good teacher! I have to tell you I’m not a particularly gifted teacher.

I’m sure your students would actually disagree… which brings me on to another subject that’s actually quite interesting to me and I think probably relevant to lots of students and even people in business, up and coming through business – is the role of mentorship. Who have been your mentors and what have they meant to you?

Edmund Phelps: I think my earliest mentor was in high school. I used to play the trumpet and I was interested in music and the head of the music department at school took an interest in me and kind of motivated me to study music in various ways. He even created a course in musicology one semester for a group of us. He was quite an important mentor. Then in college I happened to have two brilliant teachers of economics. I was extremely fortunate to have them and they guided me I think to the right graduate school for me. Then there’s graduate school. I went to Yale and there was a wealth of very important, very interesting economists including William Fellner and Tjalling Koopmans and Henry Wallich and Robert Triffen and Jacob Marshak. All of them were Europeans. And then there were also James Tobin and Tom Schelling, and no doubt others that I may be forgetting. Both Tom Schelling and James Tobin got Nobel Prizes. Which ones were mentors? Well, James Tobin was a mentor, so was Tom Schelling, but also I think Willy Fellner, a Hungarian economist was probably the deepest influence on me in graduate school.

Can you tell me a little bit more about that influence, when you say it was the deepest influence?

Edmund Phelps: He was always quite interested in the murkier side of economics, of expectations, uncertainty. He had some instinctive perception that there are entrepreneurs out there in the market economy with any kind of luck and I think he conveyed a broader and deeper kind of economics than I was getting from most of my other teachers.

These are still the things that you talk about today of course.

Edmund Phelps: Yes.

I’m just thinking it was a very interesting fact, this interest in music that you had at high school. Why the jump from music into economics?

Edmund Phelps: It’s a staggeringly difficult question.

We have lots of time.

Edmund Phelps: I guess it’s true, it seems to me to be true, that if you’re a musician, a performing musician, you try to somehow recreate that music in an interesting way. You didn’t compose it, but you are bringing your own creativity to it. With regard to economics I think economics is a very mysterious, extremely challenging subject and I think it helps a great deal to be a creative person when you tackle economic problems, economic issues, because there’s no end of things that ought to be considered and thought about. The problem is just to think of them and organise them.

This is what you talk about as well, about bringing expectations into economics and it’s finding all the variables.

Edmund Phelps: That’s right, it’s throwing in things that are of central importance that somehow got neglected, overlooked.

What are the things that you think today are being overlooked in terms of variables that are being looked at for economic policy?

Edmund Phelps: I’d have to say creativity in business; the creativity of the entrepreneur. It just doesn’t exist in any formal economics course. It may be that in some business schools there are courses in entrepreneurship but what I mean is that in the way we teach let’s say macroeconomics – the economics of employment and inflation and growth and all that – as it’s taught in standard economics courses the word entrepreneur is never mentioned. The notion that there are entrepreneurs out there who have new ideas and who upset the applecart and who think outside the box and who actually change the economic model so to speak by dint of their innovations, all that is just alien to standard economics. So there’s a lot to think about and to bring in to the subject.

This is something that we hear about continuously across Europe, and I know specifically in Sweden we’ve just recently had a change of government which wants to be more entrepreneur friendly because we are losing manufacturing jobs, like most other countries. But how do you really breed entrepreneurs and how do you really support them? In what way would you suggest that politicians actually do it?

Edmund Phelps: That’s the 64 dollar question as we used to say, when I was a teenager. I imagine that the best strategy is to do 100 things and hope that some of them work – and if they don’t, do another 100 things. I don’t know how you breed entrepreneurs. If I wanted to be fanciful I would think about maybe changing high school programmes so that students are made to understand that you could be creative in business too. You don’t have to just go into dancing or something like that. There are all sorts of avenues for creativity. I do think – I’ve been writing about this a little bit and if time doesn’t run out maybe I’ll have a chance to say something about it at the end of my lecture on Friday – but I do think that here in the west (and this includes even the United States which is of course very west) the whole classical idea of the good life, a life of adventure, expanding your horizons, discovering your talent, that notion that’s in Aristotle and Cervantes and in Shakespeare and a whole bunch of other writers and thinkers, is just about lost. People today seem to be obsessed with job security and they seem to be asking the politicians to do everything possible to reduce uncertainty. But we can’t have an exciting life if we don’t accept uncertainty.

A certain amount of risk taking.

Edmund Phelps: Lots of it, yes.

A little bit of gambling.

Edmund Phelps: Yes. A shot in the dark.

Now and again.

Edmund Phelps: Right.

Good one. I wanted to ask you a little bit – and we touched on this slightly before – but we talked a lot about successes and if I asked you which was the proudest moment of your career I’m pretty sure I know what the answer will be, but I’d like to also talk about failure because I think that shapes your route to success as well for people who hang in there and make it past a failure. Have you had any failures or anything that you would regard as a failure?

Edmund Phelps: I’ve had all kinds of failures. I never got an offer from Harvard. I never got into the American Philosophical Society, which irritates me no end. I’m an American. I’m a sort of a philosopher, too.

But why were you not allowed?

Edmund Phelps: It’s not a matter of not being allowed, it’s just they haven’t voted for me yet.

Ah, OK, is that how it goes? OK.

Edmund Phelps: I remember once – it was December 1992 and I got three pieces of dreadful news in a row – and I was talking with my wife from London when she was in New York and we were both discussing this string of misfortunes. But she said “Gee, you’re so resilient. You sound pretty upbeat considering these disasters”. I guess it’s true. I’ve always had my work to fall back on, I’m fascinated by my work and so in the end it doesn’t matter. I didn’t go into my career just to collect prizes or accolades or even money. I don’t have much money. I went into it for the adventure of it, the mystery of it.

So as long as you are able to keep your focus on your adventure and pursuing it you should be able to surmount …

Edmund Phelps: Yes, weather the storms.

… even one or two failures along the way.

Edmund Phelps: Yes. I’ve had more than one or two.

If you reflect upon them, have the failures been as important as the successes – in breeding resilience I mean; in moving ahead?

Edmund Phelps: That’s a hard question. I don’t know what to say. I’m still capable of writing books that fail. I don’t seem to have learned how to avoid that. I’m also capable of writing books that succeed. I think the thing is about learning from your mistakes, of course that must be important, but at the same time I’m always changing and the environment’s always changing. I’m not going to make the same mistake twice but …

There will be new variables?

Edmund Phelps: … it’s hard to draw lessons from the past about what to avoid in the present.

I guess I’m thinking about it in terms of students today – those people who will probably want to watch you and listen to you and ask you how did you make it – you must have had really, really bad days – how did you make it past your bad days? How do you keep focus? How do you move on? Is there any advice that you can give to people who want to hear that?

Edmund Phelps: No, just carry on.

Keep having fun.

Edmund Phelps: Yes. Keep doing what you like.

Keep doing what you like.

Edmund Phelps: Yes, I think that’s a good one.

That makes a great deal of sense actually.

Edmund Phelps: Right.

Since the announcement was made – you’re in Stockholm now, but there was some time in which you were still in the US as well – how did winning this prize actually change things for you at work, among your colleagues? What did your students say? What were the responses from people?

Edmund Phelps: I think my students were kind of thrilled by it really and very nice. My colleagues were also happy for me. It wasn’t the first Nobel Prize in economics around Columbia; it was the fourth one I think, and these came in the past 10 or 12 years. Of course it’s nice to get increased recognition in the university community and I have a little more clout now than I did before – maybe a lot more clout. So, from that point of view, that’s another dimension in which it’s very nice to have a Nobel Prize.

Are there greater expectations from you as well now?

Edmund Phelps: Yes. Now people sometimes interview me for television shows and ask impossibly difficult questions, so that’s a challenge that I could always avoid before but now …

But now you look forward to it?

Edmund Phelps: With mixed feelings.

There have to be a few reservations. I was talking about your students. We talked a little bit about how students have changed over the years. What about educational institutions themselves? How have they changed, in your opinion, over the years? I know you can’t actually generalise across the US and Europe and the rest of the world. But in general what is your feeling about the way that education is going in the institutions? What are they focusing on?

Edmund Phelps: I’m not sure that my experience is broad enough to qualify me to speak on that. As I said before, I was very lucky in graduate school at Yale to be in the middle of this hothouse of intellectuals, about half of them European. It was almost a unique time. When I was an undergraduate in college, at Amherst College, it was again a very special experience. We had wonderful courses in the humanities and in philosophy and I took several of those, also they had a wonderful economics department, really kind of inspiring. Now is that kind of thing around today? Maybe it is. It was rare then. If it is, it’s pretty rare now. Maybe I detect that there was a little more informality and a little more creativity in teaching and in shaping courses 50 years ago, 55 years ago, more creativity, more flexibility than there is now. Maybe that has to do with the fact that all the professors are so bent on their research that they don’t throw as much of their creativity and energy into teaching, and they put more of it into research than was the case 50 years ago. But then that’s nice for the students too, because then they see that their teachers are doing real stuff; they’re not just talking about the research of others.

I increasingly get the sensation that when we talk about students, what people study at universities, Sweden is one of those countries, thanks to its social welfare system, where basically anyone who wants a higher education can have one free of charge with the result that a lot of people do study and do have a higher education. At the same time there seems to be a mismatch with this creative situation, where you have lots of highly qualified people but you don’t have the jobs in industry to accommodate them. We talk about growing a services sector here to replace manufacturing jobs and there are too many highly skilled people. Would you agree that this is something that’s happening, not just here but elsewhere as well – perhaps in other Scandinavian countries?

Edmund Phelps: I wouldn’t be surprised. There’s a little debate going on in economics about how do you pep up the economies of Western Europe. Now I haven’t been thinking very much about the Scandinavian economies lately – in recent years I mean – but I know that on the continent it’s often proposed that what we need to do is step up the breadth and the quality of education. But if you don’t do something about the economy so that the economy creates jobs for more of these people who are highly educated then there’s going to be frustration and many of the newly created highly educated people will go off to Silicon Valley or something like that; they won’t stay at home. I’m sceptical about thinking that the solution for Europe’s economic problems is more education. I think it’s a better economy, and a better economy would be able to utilise more educated people.

I’m going to go onto something else now and just ask you, just for the heck of it as Americans would say, if time and money were no obstacle what causes would you dedicate your time to? What are the things that you think are important to you that you would like to spend time on but perhaps don’t have the time today?

Edmund Phelps: I would like to see the creation of better economies – let me say in the west because I’m not an expert about the economics of the Third World and the less developed countries. But I have the sense that there should be a lot of rethinking about business life, I think that there should be more recognition of the importance of intellectual stimulation in the workplace and problem-solving and discovery of talents. That’s one dimension in which I think that a great many present-day economies are woefully deficient in. The other dimension is the disadvantaged. Both in Europe and in the United States you have very high unemployment rates among the least advantaged people in the labour force and in the United States you have crushingly low rates of pay also for those people. That’s another dimension in which I’d like to see a major improvement in the performance of the economies of the west. I think this is possible. I think where you don’t have an exciting workplace – which is most of the economies of continental Western Europe – there’s a solution to that and the solution is more entrepreneurship; a lot more entrepreneurship and a quantum improvement in attitudes towards business and willingness to bear uncertainty and so forth.

So this is as much to do with business leaders leading companies as it is to do with politicians actually supporting a system that would allow them …

Edmund Phelps: I think on the regulatory front there are all sorts of things the governments can do to stop getting in the way of new firm creation and more entrepreneurial practice opportunity in established firm. Then with regard to the least advantaged there are lot of things the government could do there too. First of all a healthier economy I think would by itself create more jobs for the less advantaged and pull up pay rates of the less advantaged. But in addition the governments in Europe could do a lot more than they’re doing – and also in the United States – could do a lot more than they’re doing now to address the problem of low wages and low employment among the disadvantaged.

I’m going jump back to something now and I’m going ask you to think of being even more magnanimous than you have been now, talking about the causes you would dedicate time to. Since 1999 the economics prize has been always a shared prize which makes you break a trend here that we’ve seen. I just wanted to ask you if you could be so magnanimous, if you could choose one person to share your prize, who would it be?

Edmund Phelps: In the same subject?

Your choice.

Edmund Phelps: That’s an interesting question. You see I think the people that I used to feel myself in a friendly rivalry with in my own generation have pretty much all got the Nobel Prize now. I’m the caboose that came along. When you though the train was all done there comes the caboose there, so I don’t think there’s anybody … I’m not sure that in my generation there’s anybody my age that I can immediately think of. But I could jump to younger people: Philippe Aghion, a young French economist now at Harvard, is doing highly original work on innovation and productivity. I’d have been happy to share it with him. And I was half expecting that if I got the prize I would share it with two people with whom I worked in the 1970s at Columbia: Guillermo Calvo and John Taylor. We worked on something called the New Keynesian Economics. What it means is just that we built on the idea that firms don’t adjust their wage rates all together at a certain day of the year the way they do in Japan with the Spring Offensive. Firms adjust their wage rates maybe annually but at different times in the year. That led to quite a lot of significant work so I thought possibly I would share with Calvo and Taylor. Earlier in my career when I was working on economic growth I worked with Richard Nelson and Sidney Winter and I once or twice imagined that I’d share it with them. That would also have made me … I would have been perfectly content about that. But I have to say, Rupini, it’s great to win it alone.

I think that actually that makes a superb end to this interview. Thank you so much for your time and best of luck for the rest of your week in Stockholm and also when you get back home.

Edmund Phelps: Thank you very much.

Watch the interview

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