Posted on 10/09/2006 9:07:25 AM PDT by Zakeet
The 2006 Nobel prize for economics has been awarded to Professor Edmund Phelps of Columbia University for his work in the late 1960s overturning the conventional wisdom on the trade-off between inflation and unemployment.
The Royal Swedish Academy of Sciences said it had awarded the economics prize in memory of Alfred Nobel to Prof Phelps “for his analysis of the intertemporal trade-offs in macroeconomic policy”.
It is the second time the academy has awarded the prize to a fierce critic of post-war Keynesian macroeconomic policy. Milton Friedman, the grandfather of monetarism, won the prize in 1976.
After the second world war, practical economists noticed that as unemployment fell in many advanced economies, inflation tended to rise and vice versa. This relationship between inflation and unemployment became known as the “Phillips curve” and seemed to conform with a crude interpretation of the teachings of John Maynard Keynes.
[Snip]
Prof Phelps’ model become known as the “expectations augmented Phillips curve” and the work has had profound consequences for economic policy.
The disastrous rise in inflation in the early 1970s was partly a result of policymakers not understanding that the equilibrium unemployment rate had risen as productivity growth fell and the oil crisis hit, so they kept loosening monetary and fiscal policy to lower unemployment below this level, with the consequence of ever higher inflation.
Now, the state of the labour market and expectations of inflation are central to the policymakers’ tool kit. Monetary policy in most countries attempts to stabilise the economy around the best guess of the equilibrium level of unemployment so that expected and actual rates of inflation remain low and stable.
w00t!
Chalk up another one for Supply-Side economics!
Oh there are so many frontrunners. Mahmoud Ahmadinejad, Kim Jong-il, Hugo Chavez....
Who cares? Americans swept all the prizes that count for anything in the real world.
Literature and Peace aren't really for literature or peace, they're for the Eurotrash to stick a thumb in Uncle Sam's eye.
-ccm
So why did it take them so long?
If he's our guy, there must be some mistake.
Well, and where's a representational photo of the distinguished learned man?
Phelps also postulated that expectation of future inflation has almost as bad an effect onconsumer and business behavior than actual inflation. What Paul Volcker and Alan Greenspan did was to really kill inflationary expectations.
They're forgetting, at a minimum, Friedrich Hayek. And maybe also James Buchanan.
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