Thinking about dynamism with Edmund Phelps

A conversation with the Nobel Prize-winning economist about his intellectual journey

My apologies to “All Things in Moderation” subscribers for the paucity of posts over the past few months. My brave plans to make regular entries to this Substack were derailed first by an immoderate amount of travel — to Britain, Brazil, and Belgium as well as around the United States — and then by an inordinate amount of work-related obligations, which included moving to the Niskanen Center’s new offices in downtown Washington along with other assignments.

But I’m pleased to resume (more) regular publication of this Substack with the transcript of a discussion I had recently with the eminent economist Edmund “Ned” Phelps, who is the 2006 winner of the Nobel Prize in Economics as well as an emeritus professor at Columbia University. His recent intellectual memoir, My Journeys in Economic Theory, is both an enjoyable autobiographical reflection and a survey of the most critical economic debates of the modern era.

I should add that Professor Phelps is an inspiration to all of us who are getting into middle age and beyond for having experienced, into his eighties and nineties, an intellectual renaissance that launched his thinking in a new direction. His focus over the past two decades has been on dynamism: the creativity of “ordinary people” that enables innovation, economic growth, and mass flourishing. It’s an extraordinarily important and relevant subject for the country at its present moment of development, and one that has far-reaching implications for (among other things) how we should educate our students and encourage our workers. I hope you will enjoy this interview and seek out Professor Phelps’ memoir along with his scholarship.

Geoff Kabaservice

It’s a pleasure and an honor to be speaking today with Edmund Phelps, one of America's most distinguished economists. He is the McVickar Professor Emeritus of Political Economy and director of the Center on Capitalism and Society at Columbia University. And he is the sole recipient of the 2006 Nobel Prize in Economics. He received his B.A. from Amherst College in 1955 and his Ph.D. from Yale University in 1959. After a stint at the RAND Corporation in California, he held positions at Yale and its Cowles Foundation for Research in Economics, a visiting professorship at MIT, a professorship at the University of Pennsylvania, and finally a professorship at Columbia from 1972 onwards. He is the author of numerous books including, most recently, an intellectual memoir published in 2023 entitled My Journeys in Economic Theory. Welcome, Professor Phelps!

Edmund Phelps

Thank you. Good to talk with you.

Geoff Kabaservice

Congratulations on the publication of your latest book. Economics has been called “the dismal science,” but in fact My Journeys in Economic Theory is an absorbing and highly entertaining read. It not only relates your contributions in reshaping economic theory, it's also an intellectual adventure told through many of the principal controversies and figures in economics across the twentieth and twenty-first centuries.

It has been said of you that your work has been a lifelong project to put “people as we know them” into the oftentimes arid and abstract worlds of economic theory. As you know, I attended a conference on “Re-empowering Human Agency” at Columbia University earlier this year that was cosponsored by your Center on Capitalism and Society along with my Vital Center podcast guest Philip K. Howard’s Common Good organization. And over the course of that discussion, it became clear to me that much of the current debate over dynamism, human flourishing, the fulfillment and belonging that come from good jobs, and the debate over how to define the good life in general is derived from your thinking over the past two decades, particularly in such monumental works as 1997’s Rewarding Work, 2013’s Mass Flourishing, and 2020’s Dynamism. So I wanted to talk to the primary source, so to speak.

A short conversation cannot begin to cover the richness of your work and all of the controversies and figures you describe in My Journeys in Economic Theory. We can’t even really cover your biographical background in anything but a cursory fashion. But I do wonder about one thing… At the time that you won the Nobel Prize in 2006, the town of Hastings-on-Hudson, New York, where you had grown up, announced that you were their sixth Nobel laureate. Was there something special in that town's water?

Edmund Phelps

No, it was the standard Westchester County water. But I think it is interesting that a lot of Nobel Prize winners happened to go through Hastings-on-Hudson High School. I think the explanation is that it was widely known by parents who cared about these things that Hastings-on-Hudson in Westchester County in New York and Greenwich, Connecticut had the best high schools. So my parents, who had just arrived from Chicago, wanted me to go to one of those, and Hastings was the more convenient of the two. And so that's how I ended up spending my youth there.

Geoff Kabaservice

Can you tell me something about how you came to be interested in economics as a field?

Edmund Phelps

I don't know the full answer to that question. As I said in the introductory chapter of my book, I had a strange interest in gathering information. I once conducted a survey of the residents in the apartment complex where we lived — well over a hundred people, maybe two hundred — collecting data on the number of cats in the complex. I just wanted to know that number.

Geoff Kabaservice

And what do you think made you good at economics?

Edmund Phelps

I guess it was this curiosity, plus being fairly smart. I never thought of myself as hugely smart. A classmate of mine at college tested my IQ on the understanding that he would not reveal what my score was, and he never did. So I don't know whether I'm relatively stupid, or relatively bright, or somewhere in between.

Geoff Kabaservice

Something that stands out in your intellectual memoir which might be related to curiosity is your deep engagement with a range of creative fields, including music, philosophy, literature, cinema, and the performing arts. I was struck that your decision to relocate professionally to New York in the early ‘70s had a lot to do with your desire to follow the work of Leonard Bernstein at the New York Philharmonic, George Balanchine at the City Ballet, and James Levine at the Metropolitan Opera. Was this engagement a diversion from your work as an economist, or did your exposure to creativity in other fields somehow inform or relate to your creativity as an economist?

Edmund Phelps

All that culture was certainly a welcome diversion for me. I always liked to go to concerts and shows if I had the time and the money. Once in the middle of an opera in London, I had to pull out a scrap of paper and jot down an insight into the problem that I had been working on for the whole day and not getting anywhere with it. So there in London I missed a significant chunk of Parsifal and I never did catch up with it.

Geoff Kabaservice

But that actually sounds like a lot of stories about how scientists arrived at their great breakthroughs. I noticed that you wrote in your book that when you were at the Nobel Prize ceremonies in Stockholm, you found out that a lot of the other Nobelists had a serious engagement with music as well. So perhaps there's something about that side of the brain that's related…

Edmund Phelps

Yes, that might be part of the answer.

Geoff Kabaservice

So why did you decide to write My Journeys in Economic Theory?

Edmund Phelps

Part of the answer, I think, is that with the arrival of the Covid pandemic in early 2020, I was stuck in my study at home. After the senior seminar I had been teaching that semester was over, I took pencil in hand, figuratively speaking, and started writing. The introduction was hard, but I found that that the first chapter about my first years as an economist went pretty well and was kind of interesting, and so I had a lot of forward motion. I drew a lot of joy from writing that.

Geoff Kabaservice

I think that shows. I’m not an economist, so what I found particularly intriguing about your book was your efforts to place your work in the historical perspective of the evolution of the various schools of economic theory. This most likely will be a childishly reductive description, but as I understand it the history of economics as a discipline began with the emergence of the Neoclassical school of the 1880s and its founders like Leon Walras and Alfred Marshall, and it continued with the clash of their successors (like Joseph Schumpeter and Irving Fisher) with a new school of Modernist theorists (like Frank Knight and John Maynard Keynes). Your work in the 1960s grew principally out of the work of the Modernists, and so might be dubbed the New Modernist school. In the 1970s, you came into conflict — intellectual conflict at any rate — with the New Classicists like Robert Lucas. Is my description more or less accurate?

Edmund Phelps

Bang on.

Geoff Kabaservice

Good. Who were the economists who had the most impact on your thinking?

Edmund Phelps

At Amherst, I remember a couple of times slipping into the college library and stumbling on the controversies in the academic journals between Keynes and Friedrich Hayek. I saw these brilliant men sparring with each other, making their arguments while knowing they probably were not one hundred percent right. This was a world that I hadn’t gotten into at all before, and it fascinated me.  

When I was in graduate school at Yale, my professor William “Willie” Fellner was overheard saying in a Hungarian restaurant in New Haven that I might make a mark. That was kind of stirring when I heard about that. Of course it’s nice to hear expressions of confidence and hope like that.

Geoff Kabaservice

It seems that early in your career, you were more or less operating in the Keynesian tradition, but you also were frustrated by the rigidity of some of his followers and also noticed certain blank spaces in Keynes's theory.

Edmund Phelps

I often said, early in my career, that I went to graduate school to understand how to reconcile the macroeconomics of Keynes and Hicks with the standard microeconomics of Alfred Marshall. I wondered how people could stand up at the podium and go from one to the other as if the first one had not existed. It was probably in the back of my mind when I was back at Yale as an assistant professor at the Cowles Foundation. Towards the end of my years at Cowles, as I was on my way to the University of Pennsylvania, I began to create a microeconomics that would support the macroeconomics of Keynes and Hicks.

Geoff Kabaservice

From my reading of your book, it appears that most of your early work was on subjects like the sources of economic growth, public debt, fiscal policy, inflation, monetary policy, unemployment, and the role of imperfect information in the formation of the expectations of various actors in the economic system. And indeed your vanguard contribution to the economics discipline, according to many of the sources I've read, was that you led the way in introducing imperfect information, imperfect knowledge, and market frictions into macroeconomics. I take it that most economic models hadn't really taken significant account of this kind of uncertainty before.

Edmund Phelps

That’s right. The gap between microeconomics and macroeconomics was sometimes in the way macroeconomics was taught; professors almost seemed to forget that they were talking about live people making these decisions. I thought it was important that macroeconomics take into account firms’ expectations and the imperfect nature of the information available to them.

Geoff Kabaservice

I found it quite interesting to read about your friendship with the philosopher John Rawls, who you met for the first time in 1969 when you were both at Stanford University's Center for Advanced Study in the Behavioral Sciences. Rawls was then writing his magnum opus, A Theory of Justice. What was he like and how did his thinking affect your own?

Edmund Phelps

He was a very kind person and hugely well educated, as you would expect from somebody teaching philosophy at Harvard. But he also had a great feeling for the disadvantaged and an awareness of racial injustice. So I think he had an impact on my perception of what was going on in society at that time. And he was such a serious scholar that I imagine he encouraged me to be serious too, and to do the very best I could to measure up to the high standard he set.

Geoff Kabaservice

Your interpretation of Rawls, if I understand you correctly, is that his Theory of Justice is about rewarding the work of the least advantaged — and not, as many welfare proponents believe, about just raising taxes to spend huge amounts of money on the poor in general. You note that late in his career he did write that those who surf all day in Malibu must find a way to support themselves and would not be entitled to public funds. Have I stated your interpretation of Rawls accurately?

Edmund Phelps

Yes, but I had to prod Rawls to say that about the Malibu surfer. But in the last part of his career, he did see the necessity of making that explicit. Rawls made the point of saying that his idea of subsidizing the wages of the lowest-paid people in a business does not apply to people who are just out there hanging out on the beach. He finally made that clear. Even today, I'm a little bit sad to hear when some of the politicians whom I admire don't make any distinction between the working poor and the poor in general.

Geoff Kabaservice

I think that's a critical distinction, and it certainly was one that played a major role in your own writings, as I mentioned at the outset of our discussion. The importance of work — and the importance of good jobs that give people opportunities to experiment, explore, and create — has played a significant role in your thinking over the past two decades. But even in your 1972 book Inflation Policy and Unemployment Theory you recognized that being employed brings what you called “feelings of self-respect, esteem in the community, a sense of economic independence, and job satisfactions.” And this already was a departure from standard economics which recognized only the disutility of work and had no conception of job satisfaction.

Edmund Phelps

You’ve put it very well. I was very much interested, even in the early 1970s, in driving home as best I could the importance of work. And of course the workplace, in a well-constructed economy, is a good place for looking around and thinking how things are being made, and that can lead to the formation of new ideas: “Say, maybe we can do this thing in a better way.” And so I've been pushing the idea that the workplace is not divorced from creating the new — far from it. It's a setting in which new ideas may be sparked.

Geoff Kabaservice

It also seems that you have paid a lot of attention in your work to the failures of Republican and Democratic governments alike to do enough to support the lowest-paid workers. It's true that we’ve had the Earned Income Tax Credit since it was championed by Louisiana’s Democratic Senator Russell Long and signed into law in 1976. But it’s clear that you don't think that the EITC did enough or went far enough to ensure a decent standard of living for the less advantaged, and that this has had a lot of bad knock-on effects that account for many of persistent problems in the U.S. economy, including the stagnation of wages of about half of the workforce, the drop in male labor force participation, and the downward slide in job satisfaction. So what should government do to support the lowest-paid workers, in your opinion?

Edmund Phelps

I think they should adopt Rawls’ idea of subsidizing firms as a device to make it worthwhile for firms to pay higher wages for their low-wage workers. If you give the workers $10 more per hour, but the government will cover 5 or 6 or 7 of those dollars, then your contribution is being leveraged by the contribution of the government. And then of course that will bring an increase in the number of people who want to work, and that's good for business. It would probably widen the economy and make the workplace a better place, which might also lead to a better rate of innovation.

Geoff Kabaservice

You didn't say much in your book about how you place yourself politically. I do wonder what are the elements of your economic philosophy that might be more congenial to the political left and which, if any, are more congenial to the political right.

Edmund Phelps

These days, I don't feel at home on either the left or the right. There's just me and Jack Rawls, and he's not around anymore. And the country is in such grave difficulty these days, although perhaps that's overly pessimistic. Maybe it would be possible to persuade at least a few politicians to listen to ideas for fixing the problems of the working poor.

Geoff Kabaservice

I was interested to see that you are very skeptical about one of the solutions that has been proposed on the left, which is the idea of a Universal Basic Income. It was advocated in the 1990s by the Belgian political philosopher Philippe Van Parijs and more recently was put forward by political candidate Andrew Yang. Why are you skeptical about proposals for UBI?

Edmund Phelps

It's arguably the right goal, but UBI enthusiasts have not found the right way to get there. The first objection to UBI is that it doesn’t do the right things. The second is that it's going to cause a lot of people not to join the labor force, if they can get a nice income just by sitting around watching TV all day, and demonstrate that experience of working to their children. In my view, the UBI would have a disastrous effect on society on top of the problems that already burden society.

Geoff Kabaservice

Something very interesting to me about your career is that by the time you were awarded the Nobel Prize, you were already in your late sixties. If you were French, you would have been retired for several years already. But at that time you actually embarked in a very different and very creative direction.

I was struck by what you wrote in your introduction to My Journeys in Economic Theory about how you were looking for a fresh perspective on the kind of modern economy that historian Paul Johnson saw as beginning around 1815 in Britain and first flowering around the late 1850s in the United States. When you looked back at the standard theories of your contemporaries, and of your own theories as well, you wrote, “I began to think it was odd that while I and other economic theorists had been using the creativity that people commonly have, thus the imagination to create new theories and new things, in not one of the existing theoretical models were any of the actors described as exhibiting the slightest creativity!” And this led you to doubt Joseph Schumpeter's theory of innovation as a means of explaining the explosion of productive growth from the mid-nineteenth century to the mid-twentieth century.

You wrote, “I felt ready to build a theory based on the ability and inclination of a great many people to use their creativity — their ingenuity and imagination.” And this led you to write about dynamism — the innovation and economic growth that are fueled by the creativity of ordinary people within a nation — and the mass flourishing that dynamism enables. But these issues actually were fairly removed from a lot of what you had studied earlier. So what made you decide to take this new departure in your economic thinking?

Edmund Phelps

Perhaps it was a mania that came over me — or at least a vision. At any rate, sometime in the course of thinking about innovation in the first decade of the new century, I began to realize that even in a rather ordinary kind of firm an employee might hit upon a better way of producing what they are making — or even hit upon a new product to make. “Ordinary people” have powers of creating extraordinary things. And so that was a critical starting point for reflecting not only about the rate of innovation and its relation to the growth rate and all of that; it also got me interested in the good life and the joy that can come from hitting upon a solution to something.

Geoff Kabaservice

Your great work from this period is that 2013 book I mentioned, Mass Flourishing. It strikes me as similar in many ways to Jacques Barzun’s 2000 magnum opus From Dawn to Decadence, which I know we both appreciate. It seems to me that in different ways, both you and Barzun are describing the evolution of the ideas and values — particularly the modern values of individualism, vitalism, and self-expression — that grew out of the Renaissance and the Enlightenment. And these were the ideas and values that undergirded the dynamism and mass flourishing of Europe and the United States and some other modern societies in the nineteenth and twentieth centuries. But just as Barzun believed that western societies had entered a phase of decadence by the late twentieth century, part of the message of your book is that western nations have also suffered a loss of the modern values needed to generate dynamism. Am I reading you correctly?

Edmund Phelps

That's absolutely right. There does seem to me to have been a loss of those ingredients that people need to spur them on to create new things. And as a result, we have now suffered a slowdown in the growth of productivity, resulting in a lot of disappointment and frustration especially among middle-income workers. They feel that they’ve fallen behind, and they’re not all wrong.

My shorthand description of the situation is that society as a whole has lost a lot of its dynamism. We've still got a few geniuses out there, some of whom have new ideas of immense commercial value, and so we're going to get those innovations. But we're not going to get this mass of innovation that we had from the 1880s until about 1970.

America used to be a place where people had so much fun coming up with new stuff or going to the store and discovering a new product. My friend Richard Robb happened upon a story that I grabbed and inserted into Mass Flourishing. In 1859, Abraham Lincoln was touring the country to get a sense of whether it would be plausible that he could become the next president. And one of the things that he commented on in the essay that he wrote after this tour was: “Young America has a great passion — a perfect rage — for the new.” I don't think that applies to the America of today. If anything, we're afraid of the new.

Geoff Kabaservice

You wrote that the “modern experience” of the nineteenth and twentieth centuries was “the ceaseless change, the endless problem-solving, the pleasure of encountering the new, and much more, including modern music and modern art.” And it's that kind of hunger for the new that seems lacking in a large part of the population now.

Edmund Phelps

That's certainly true. I very much believe that.

Geoff Kabaservice

If we are in this period of stagnation — or even decadence — then how are we to get out of it? In your book you express the hope that if the societies of the West were somehow to regain the values of the Renaissance and the Enlightenment, or rediscover in themselves these values, or remove whatever has blocked a continuation of the mass innovating, the resulting rebirth would work miracles. Western nations would then regain rapid growth and widespread flourishing, and that could be expected to put an end to many of the social tensions that have engaged public discourse and depressed Western societies.

So, with apologies for the overly broad nature of this question, I'd like to ask what kinds of policies you think that the government should pursue, what schools and universities should provide, and even what firms should do to encourage and reward their employees. First of all, what kinds of policies would you like to see the U.S. government pursue that would be conducive to society-wide dynamism and flourishing?

Edmund Phelps

Well, part of why we're not there yet is that I don't think many of us have a clear conception of what the first steps ought to be. As I was listening to your posing of the question, I was thinking that maybe the Amherst College of my youth with its required humanities courses was a good place to spur people to try new stuff. One of my classmates, Mike Sahl, became a well-known composer. Another, Ralph Allen, wrote the musical Sugar Babies. I think Amherst was trying to stimulate us, to spur us on to do something new, something important, something worthwhile to society. Recovering that sense of stimulation would be a good place to start.

Geoff Kabaservice

I do find it interesting that when you were a student at Amherst, the poet Robert Frost would visit — because he lived not too far away — and he would encourage students to choose the road less traveled by.

Edmund Phelps

Yes. Robert Frost had some connection to Amherst College, and he made occasional visits there to speak to a small group of us in my senior year. He did encourage us to step out into the new. Perhaps that had an impact.

Geoff Kabaservice

As a final question, are you optimistic about the likelihood of renewal of dynamism in America and other free societies?

Edmund Phelps

That's a very difficult question. I can well imagine that we're not going to succeed at this, and maybe some other country will hit the right notes, so to speak. It's not too soon in the development of modern China to wonder if they might ultimately have a very creative society. I don't think we really know the answer to that question yet. But whether American society will regain that passion for the new, the excitement of new methods, new products... I just don’t know. Maybe some forward-looking people like the group who founded Amherst College will spring up, and the joys of exploration and achievement will come back to people. I do think that new institutions are more likely than old ones to provide a new impetus for creativity.

Geoff Kabaservice

Professor Edmund Phelps, thank you so much for joining me today. I very much hope that America can recover the kind of dynamism and mass flourishing that you have described so well in your works.

Edmund Phelps

Thank you very much. I enjoyed the interview.