Last week the Royal Swedish Academy of Sciences finally addressed the biggest and longest-standing anomaly in its roll of Nobel laureates in economics: the fact that the name of Edmund S. Phelps was not on it. Phelps, a Columbia University professor, co-invented modern macroeconomics—the study of aggregate output, inflation, and unemployment, and the policies that affect them. The ideas that all mainstream economists now carry around in their heads about how economies respond to interest rates or taxes or public spending spring from a theory developed independently by Phelps and Milton Friedman at the end of the 1960s. Friedman got his Nobel 30 years ago, for this and other work. It is a travesty that Phelps had to wait so long to be recognized, especially when you look at some of the names honored in the intervening years—but, still, better late than never.
Phelps's ascension to Nobel immortality is especially welcome for another reason. He has never commanded the attention outside the economics profession that his brilliance, interests, and practical turn of mind ought to have brought him. Why was that? The likely answer, I think, is worth pondering because it reflects badly on America's political culture. It is that Phelps is an independent thinker. He has followed no particular school, has run with no duly constituted political tribe.
This is not true of the figures who have overshadowed him in popular acclaim. Friedman's influence—though founded, without question, on his stature as a thinker and a scholar—also owed something to the fact that he supplied the brainpower for a whole political movement. And some lesser economists, or pseudo-economists, such as John Kenneth Galbraith, were equally lauded in their time even though (as I argued of Galbraith in a previous column) they brought little more to the table than an affectation of intellectual profundity. The conservative Friedman and the liberal Galbraith disagreed about everything. That, and the attention they commanded outside their professional circles, were mainly what they had in common:
People knew whose side they were on.
Phelps has always been difficult to place. This is not because he ventures no politically charged opinions. He has taken stands, based on careful economic reasoning, on some controversial issues—but the thing is, he is inconsistent, politically speaking. He does not appear to be on anybody's side. Sometimes he sounds like an unyielding conservative, sometimes like a raging liberal. The man is downright unpredictable. America cannot tolerate that in its public intellectuals, any more than in its politicians.
The implications of the Phelps-Friedman breakthrough of the late 1960s were "conservative," to be sure. At that time orthodox thinking in economics held that governments had to grapple with a long-term trade-off between inflation and unemployment. You could run an economy at a high level of demand and create jobs for all who want to work, but that would push inflation up; or you could keep inflation low by curbing demand, but that would raise unemployment. In the early postwar years, most governments believed that they were ruled by this dilemma. They could steer for low unemployment and high inflation or low inflation and high unemployment, but not for both low inflation and low unemployment.
In this once-prevailing view, good economic policy was a matter of striking a balance between the two objectives and avoiding the instability that veering from one to the other would cause. This mandate had a political dimension. The Left cared more about keeping unemployment low than about avoiding inflation and promoting stability. The Right tended to prefer the opposite.
While disagreeing about priorities, both sides thought about ways to defeat the underlying trade-off. For many years, most left-leaning economists advocated central control of wages and prices. That way, they thought, you could run the economy at a level of demand sufficient to suppress unemployment while avoiding the inflation that would otherwise result. Right-leaning economists warned of the unintended consequences of regulation and the hidden costs of price and wage distortions.
Nonetheless, the notion that price and wage controls could resolve the dilemma was so appealing that, at one time or another, most governments gave them a try. The results were always disappointing, especially in the United Kingdom and Western Europe, which persisted more than most in the effort. (America's flirtation with this approach, incidentally, was the origin of today's wasteful and inequitable employer-based health insurance system, which firms first adopted as a way to evade wage controls. Talk about unintended consequences.)