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ROBERT SIEGEL, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

In the 1960s, economist Edmund Phelps challenged the way that economists saw the relationship between inflation and unemployment, and this morning the Columbia University professor learned in a phone call that his work had earned him the Nobel Prize in Economic Sciences. He's been taking phone calls non-stop since, and now it's our turn. Welcome to the program and congratulations, Professor Phelps.

Mr. EDMUND PHELPS (2006 Nobel Laureate): Thank you.

SIEGEL: As I understand the Nobel citation, which is very poorly, economists used to say that inflation goes up then unemployment goes down and vice versa?

Mr. PHELPS: Well, what the Phillips curve said was that when inflation goes up, then employment goes up. What they had in mind, the theorists behind the Phillips curve, was if aggregate demand for the output of the economy as a whole increased, that would pull up employment, though at the cost of some corresponding speed-up in the rate of inflation.

SIEGEL: What was it that made you question that assumption?

Mr. PHELPS: Well, there was really no foundation for it. They didn't have any model of the economy with firms and workers and whatnot on which to base this claim. It was just dreamed up, just asserted. So I began to think about it.

SIEGEL: When you say that the economic theorem or whatever that you were challenging, the Phillips curve, wasn't really based on anything, it was just dreamt up.

Mr. PHELPS: Right. That's right.

SIEGEL: Did your work represent a step forward in economic analysis, use of computers or modeling? What was different about this?

Mr. PHELPS: Modeling.

SIEGEL: Modeling.

Mr. PHELPS: I constructed a model in which firms set their wages based on their understanding of how tight the labor market is, how low the unemployment rate is and how high the quit rate's going to be, but also based on their expectations of what the other firms are going to be doing with their wage scales.

SIEGEL: You were doing this work in the 1960s.

Mr. PHELPS: Yeah.

SIEGEL: And so the gap between your creative work and the Nobel is roughly the time that Moses spent wandering the desert, I guess. It's about 40 years. Has every October been a time of wondering and getting questions from family? Have you heard anything happening in Stockholm this year? Or no?

Mr. PHELPS: A lot of people say well, if he's so good, how come he doesn't have a Nobel Prize? It was very hard for my supporters to explain. But anyway, it's all got sorted out.

SIEGEL: Well, it's obviously a sign of great achievement to travel in circles where one is expected to have a Nobel Prize.

Mr. PHELPS: Yeah, that's right. All my friends have them. I was the only one that didn't have one.

SIEGEL: You're keeping up with the Friedmans.

Mr. PHELPS: That's right.

SIEGEL: What's it been like today since you got the phone call this morning?

Mr. PHELPS: Extremely hectic. We had three phone ringing simultaneously in the apartment, with my wife manning at least two of them. I've barely had time to eat any breakfast, we haven't had any lunch, but it's been a lot of fun. I'm not complaining.

SIEGEL: No, I should think not. It must be very gratifying to be honored that way.

Mr. PHELPS: Yeah, it's tremendously gratifying, and it's also a load off my mind. I don't have to think about it anymore.

SIEGEL: Well, there are some people who receive two Nobel Prizes. I don't know if that's ever happened for economics.

Mr. PHELPS: Yeah, I'm not going to go for that.

SIEGEL: Okay, you're standing pat with one.

Mr. PHELPS: That's right.

SIEGEL: The model that you did back in the ‘60s, does it hold up, or have you gone back to revise it many times in the decades since?

Mr. PHELPS: Actually, in many ways I use large parts of it. I can even use parts of it to describe an economy without money. It works fine. You have to make some modifications. But sometimes I like to say okay, let's forget the money. Let's just dispose of the economy that needs money - it just buys and sells on the basis of credit and whatnot - IOUs and common stock or something like that as the medium of exchange.

So yeah, so the basic ideas of why is there unemployment, why is the unemployment involuntary and what really determines this equilibrium level of unemployment that's kind of hard to depart from very far and for very long -what is it that really determines it?

SIEGEL: Well, before I let you go, Professor Phelps, have you met with students today? Have you had a chance to teach?

Mr. PHELPS: My intentions were good, but we finally had to abandon ship, and I've cut them off. They're without me this afternoon.

SIEGEL: Seminar cancelled, champagne toast instead.

Mr. PHELPS: That's right.

SIEGEL: Well, Professor Phelps, thank you very much for talking with us.

Mr. PHELPS: Thank you very much.

SIEGEL: That's Edmund Phelps, professor at Columbia University and winner of this year's Nobel Prize for Economic Sciences.

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