'Revolutionary' economist wins Nobel prize

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A US economist has won this year's Nobel prize for his ground-breaking work on the trade-off between unemployment and inflation.

Edmund Phelps, a professor at Columbia University in New York, made findings on the link between inflation expectations and the economy that has become a tenet for today's central bankers.

The award to Professor Phelps, 73, carried a Skr 10m (£723,000) prize. The award is made by the Royal Swedish Academy of Sciences and is officially known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

In a conference call from New York with reporters in the Swedish capital, Professor Phelps said: "It's beginning to sink in that I have won this wonderful award. I understood that it could happen, but I had no idea when it would happen or if it would happen."

Along with Milton Friedman, who won the prize in 1976, he built on the theory that there was an "equilibrium" rate of unemployment, which could not be artificially lowered by government action without fuelling inflation. He found that inflation expectations could get embedded in the economy and that successfully lowering them would enable to the equilibrium rate to fall without creating inflation. The findings laid the groundwork for the focus among central banks on establishing credibility in the markets for their efforts to fight inflation.

Professor Phelps said: "I tried to put the people back into our economic model and in particular to take into account their expectations about what other economic actors are doing at the same time and in the future."

Professor Christopher Pissarides, of the Centre for Economic Performance at the London School of Economics, said: "The prize was richly deserved and long overdue. He revolutionised our way of thinking about the inflation-unemployment trade-off, which has influenced policymakers since the 1960s."

Joseph Stiglitz, who shared the 2001 prize, called Professor Phelps' theories "the most important work of macroeconomics of this generation".

Paul Samuelson, who in 1970 became the second recipient of the Nobel economics prize, told Bloomberg: "We all understand today, because of work by Ed Phelps, that you can't just, by raising wages, bring unemployment down to an extreme limit, because it becomes self-defeating."