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Interview transcript

[Unidentified] – Hello.

[Adam Smith] – Hello, may I speak to Professor Phelps please?

[Unidentified] – Who’s calling?

[AS] – I’m calling from the official website of the Nobel Foundation in Stockholm, and my name is Adam Smith.

[Unidentified] – Yes, ha, ha, ha.

[AS] – Yes, I know, it could be a hoax call with a name like that, I realize. It’s a terrible burden I carry.

[Unidentified] – Yes, would you hold on a moment please because he’s on with CBS at the moment.

[AS] – Certainly.

[Edmund Phelps] – Good morning.

[AS] – Professor Phelps?

[EP] – Yeah.

[AS] – Well, first of all, congratulations on being awarded the Prize in Economic Sciences.

[EP] – Thank you, thank you very much.

[AS] – What were you actually doing when …

[EP] – Honoured to have this prize.

[AS] – What were you doing when you received the call?

[EP] – Sleeping.

[AS] – And have you been able to do anything since hearing the news or has it been constant telephone calls.

[EP] – I have done nothing but take phone calls and have some nice interviews.

[AS] – I’m sure. You’ve been awarded the prize for your contributions to several different fields, and the common theme seems to be an increase in our understanding of goal conflicts and intertemporal tradeoffs. Am I right in summarizing one key finding as being the relationship between employment and inflation rates is less straightforward than was previously assumed?

[EP] – That’s right.

[AS] – And one real world implication of this is that long term unemployment rates can’t be adjusted by simply manipulating inflation rates?

[EP] – Exactly right, exactly right.

[AS] – Right. Are there any particularly striking examples where this sort of revision of thinking has been used for policymaking?

[EP] – Well, in the 1960’s, and stretching back to the 1930’s, it was felt by many economists that easy money is a reliable way to increase employment. And first the doctrine was that there would be no cost in terms of inflation, and then the revised argument was the Phillips curve, that a little bit of increased employment would have only a little bit of cost, in terms of a little bit higher rate of inflation. And now central banks don’t think that way at all, a lot of central banks never did think that way, but central banks are no longer under pressure to keep lowering interest rates in order to boost employment. It’s now widely understood in economies all over the world that the market will send …, that if employment is pushed too far then the rate of inflation will take off, which would be unacceptable. It was gradually learned that acceptance of a somewhat higher inflation rate would not really bring somewhat higher employment. That you’d have to keep on raising the inflation rate to higher and higher levels in order to try to keep employment elevated to the level that you thought you …

[AS] – … you were aiming for.

[EP] – … you could do it.

[AS] – And I would have thought one of the general problems with working on such intertemporal tradeoffs would be the length of time that it takes these scenarios to play out. The experiments one wishes to conduct must last for many years, or indeed decades?

[EP] – That’s absolutely true. When I first [real]ized that no good would come from increasing the inflation rate to a higher level there wasn’t any way of really backing that up with statistical analyses. That was only in 1966 really when I was first writing about that and we didn’t have a hundred years of data, or anything like that, with which to test statistically such ideas. So in a sense there was no way of convincing most economists on the point until there was virtually an experiment; in the 1970’s the Federal Reserve Bank in the United States embarked on policies that led to appreciably higher rates of inflation, with the thought that that was a way of escaping from the fall of employment that had occurred early in the 1970’s, and it seemed not to work. And that was probably the decisive moment for this theory. So people went from being skeptical about it to being converts.

[AS] – Yes, I suppose as theorists you’re always at the mercy of what governments and central banks choose to do, in waiting for your experiments to come to fruition.

[EP] – Right. Yeah it’s very, very frustrating to get governments to act on something. I mean I’ve been trying for ten years to get governments to adopt low wage employment subsidies to pull up the demand for low wage labour, and there are all sorts of reservations that governments have about that and I guess the only thing that will persuade them is when some government is willing to do the experiment on a large scale so there can be few doubts about interpreting the subsequent data.

[AS] – Another area where your work has been influential is the study of capital accumulation, and balancing short- and long-term objectives there. Again, I suppose the question would be are there real world examples that spring to mind where you think your findings have been put into practice?

[EP] – The subject of national saving is one I’ve come back to over and over again. It may be relevant to your question to say that right now in the United States and in several European countries, we’re facing a kind of demographic overhang of huge pension obligations that the government has committed itself to pay out between the years 2020 and 2050, and one would think that a future minded policy would be in order, and that would involve perhaps raising some tax rates in the present and perhaps cutting back expenditures in the present in order to have budgetary surpluses so as to accumulate a kind of nest egg for paying out those …, for meeting those government obligations in the future. But then the supply side economists have come along and said that’s not the way to go, it’s better to grow your way out of the problem, and it’s possible to do that by cutting tax rates. So, that’s an example of a controversy very much involving intertemporal tradeoffs with regard to saving and investment and consumption and so forth, and labour.

[AS] – Thank you, thank you. Of course last week there was the award of the Nobel Prizes for physical and life sciences, and in those fields there’s a constant interplay between basic and applied research. Do you think the same categories apply to research in economic sciences? And also, the sort of sequela of that, is where do you think your research fits in?

[EP] – Interesting questions. Well, I’m not very happy with those terms basic and applied. I do think from time to time that conceptual questions arise; what do we mean by equilibrium, what do we mean by this concept and that concept? And so to clarify matters we often need to work with a very [word inaudible] model, that has no particular connection with any particular country. So all kinds of economic research activities do from time to time raise questions about the concepts and there is sometimes a sense that the concepts are not clear, that the questions being asked are not clear, and so you have to dig deeper. So that kind of basic research has to always be a part of our portfolio of research activities. But at the same time applied research is necessary too because if we don’t do any applied research we may miss learning that some of our models have implications that appear to be contrary to the data, appear to be counter-factual, not empirically borne out. A healthy economics has got to have both conceptual, theoretical research and applied, empirical research. Well, I think of myself as a theorist, so I think of myself at the conceptual end, but I would like to say, modestly if possible, that I have paid pretty close attention to questions of whether the data are consistent with what my models say.

[AS] – Well I think that was made very clear in the announcement just a little while ago …

[EP] – Oh good, good.

[AS] – … the fact that your work has had profound real world implications. One question that we often like to ask people is whether there has been any one event or person in particular that led you to work on the problems you chose to study?

[EP] – I was always interested in macroeconomics, probably for a complex of reasons, and so a lot of my contacts with my mentors were about macroeconomics and I’d just like to mention that in graduate school two professors had a profound influence on me. One was William Fellner, and the other was James Tobin, though I also got a lot from Thomas Schelling and Tjalling Koopmans. I soaked up as much of their knowledge as I possibly could, but it’s probably correct to say I’ve gone in my own directions and my work is generally different, generally has a different thrust and character from theirs.

[AS] – Others are soaking up your influence now.

[EP] – Yes.

[AS] – Well, when you come to Stockholm in December we have a chance always to speak at greater length to the Laureates, so perhaps those influences on your early career we can explore in greater detail. But I suppose my last question would simply be to ask how you might plan to celebrate the award later today when you finally get off the phone with the journalists?

[EP] – Uh, celebrate later today. You mean like dinner?

[AS] – I don’t know, yes, any …

[EP] – The thing I’m looking forward to most at the moment is breakfast.

[AS] – I bet, yes … it’s got to be a two egg day, at least!

[EP] – I’ve been scared by cholesterol a long time ago, it’s seldom that I see an egg. Although I understand that the white of the egg is quite safe.

[AS] – That’s what they say, and this is a red letter day after all.

[EP] – Right, I’ll ask my wife whether, perchance, she has an egg in the house.

[AS] – OK.

[EP] – There will probably be an event at Columbia, and I don’t know when.

[AS] – I imagine they’re planning press conferences as we speak.

[EP] – Yeah, right.

[AS] – Well, it’s been very kind of you to spend time talking to us, thank you very much indeed, I’ve enjoyed it a lot.

[EP] – Well, thanks for calling. Bye.

[AS] – Have a good day, bye.

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