The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2006 Awarded to Columbia University's Edmund Phelps. (October 12, 2006)

    The Royal Swedish Academy of Sciences has awarded the 2006 "Nobel Prize for Economics" to Edmund Phelps "for his analysis of intertemporal tradeoffs in macroeconomic policy".

According to the Academy's announcement the Columbia University McVickar Professor of Political Economy and Director, of Columbia's Center on Capitalism and Society "has deepened our understanding of the relation between short-run and long-run effects of economic policy. His contributions have had a decisive impact on economic research as well as policy."

Prior to Professor Phelps' analysis, it was conventional wisdom that the price for reduced unemployment was a one-time increase of the inflation rate. "Phelps challenged this view through a more fundamental analysis of the determination of wages and prices, taking into account problems of information in the economy. Individual agents have incomplete knowledge about the actions of others and must base their decisions on expectations."

Professor Phelps postulated and quantified that inflation depends on both unemployment and inflation expectations.

The Academy continues:

As a consequence, the long-run rate of unemployment is not affected by inflation but only determined by the functioning of the labor market. It follows that stabilization policy can only dampen short-term fluctuations in unemployment. Phelps showed how the possibilities of stabilization policy in the future depend on today's policy decisions: low inflation today leads to expectations of low inflation also in the future, thereby facilitating future policy making.

And then makes the point that ought to give nations such as Australia and it politicians pause:

Another issue where intertemporal tradeoffs are of central importance concerns the desirable rate of capital formation. By foregoing consumption for investment in physical as well as human capital (education and research), today's generation can raise the welfare of future generations. Phelps clarified possible distributional conflicts among generations. He also showed that all generations may, under certain conditions, gain from changes in the savings rate. Phelps also pioneered the analysis of the importance of human capital for the diffusion of new technology and, hence, for growth.

For a fuller account of of Professor Phelps contributions click here.