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December 2, 2007

Phelps: I Can Afford To Be As Radical As I Want To Be

An interview with Edmund Phelps:

Lunch with the FT: Edmund Phelps, by Ralph Atkins, Commentary, Financial Times (free): ...Traditionally, the Nobel prize for economics recognises work that was carried out many decades ago but still has relevance today. [Edmund] Phelps won his for work in the late 1960s that overturned then-conventional wisdom that a stable relationship existed between inflation and unemployment... But he is also renowned for his criticism of continental European “corporatism”, which he believes hampers interaction between entrepreneurs and financiers, and results in Europe relying on the import of ideas and techniques from the US. It is his explanation for continental Europe’s dismal growth in the past decade. ...

Phelps feels that he is at the stage in his career “where I can afford to be as radical as I want to be. And so I am having a lot of fun thinking about capitalism and trying to imagine how economics would have to be re-written to capture the heart of that kind of system.” Traditional economics, he explains, sees the world as if it were a plumbing system. “It’s basically rooted in equilibrium – things work out as people expect them to do.” Capitalist reality, however, “is a system of disorder. Entrepreneurs have only the murkiest picture of the future in which they are making their bets, and also there is ambiguity, they don’t know when they push this lever or that lever that the outcome is going to be what they think it is going to be – there is the law of unanticipated consequences. This is not in the economic text books, and my mission, late in my career, is to get it into the text books.” ...

I switch the conversation to Europe, which, Phelps believes, is doomed always to trail behind the US... “I don’t begrudge Europe waiting to see what works in America before expending the resources to adopt this or that new good or technique,” he says. “I just think that the Europeans are depriving themselves of a high-employment economy and they are depriving themselves of intellectual stimulation in the workplace – and personal growth – by sticking to the stultifying, rigid system that I call corporatism.”

Phelps says Italian friends tell him that things have changed, that “we’re virtually like America now”. But notwithstanding Europe’s impressive growth rebound lately, he sees too much backsliding. ...

He concedes comparisons with the US have to take account of Europe’s ageing population, and that the rise of capital markets, hedge funds and private equity may be forcing change across the continent. But the important venture capitalists in Germany are American, he points out. “Perhaps that speaks volumes about how much of a handicap it was for German businesses to operate under the old Landesbanken [the country’s public banks] and all those old decrepit, giant investment banks. Now the Germans are getting the benefits of some good features of globalisation.” ...

Phelps is anxious to make it clear that he “is not one of those American economists” who say that Europeans object to wealth creation. “My God, I don’t know anyone who likes to accumulate their wealth more than the Europeans. ... I don’t need to be told that Europeans are in many ways like Americans. They like to work; they like to be wealthy. But they have all these other attitudes that get in the way of an effective economic system.” ...

Might his distinct view on capitalism and the necessity of embracing change result from his having been born during the Great Depression, in which both his parents lost their jobs (his father was in advertising, his mother a nutritionist)? Phelps is emphatic. “I was a little kid at the time. It wasn’t formative at all.”...

More important for him, he explains, was his time at Amherst college in the early 1950s, a time when he read inter alia the Greek heroic epics, Cervantes’s Don Quixote and Ralph Waldo Emerson on self-reliance. “Without being aware, I think I was being indoctrinated into what was called Vitalism, the idea that what makes life worth living, the good life, consists of accepting challenges, solving problems, discovery, personal growth, personal change.” His reading of philosopher David Hume taught him “the importance of imagination in understanding things”, while Henri Bergson’s Creative Evolution argued for free will against determinism. ...

Phelps reflects that he did his seminal work relatively late in his career – he was in his mid-thirties. Robert Mundell, a Columbia University colleague, received his Nobel for work published when he was a decade younger. “I spent a lot of my early years writing papers on growth economics that I wish I’d never bothered to write. It just took a long time for me to mature and have anything to say that was of any originality.” ...

After hesitating, [Phelps] asks if I would like to walk a few yards north to the American museum of natural history. There, in the park outside, there is pink stone monument inscribed with the names of all American Nobel prize winners since Theodore Roosevelt won the peace prize in 1906. At the bottom of the second side is Phelps’s name, added only a few days previously. Phelps pauses in silence, then points to some of his contemporaries also listed. He is touchingly proud.

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