The 2006 Nobel prize for economics has been awarded to Professor Edmund Phelps of Columbia University for his work in the late 1960s overturning the conventional wisdom on the trade-off between inflation and unemployment.
The Royal Swedish Academy of Sciences said it had awarded the economics prize in memory of Alfred Nobel to Prof Phelps “for his analysis of the intertemporal trade-offs in macroeconomic policy”.
It is the second time the academy has awarded the prize to a fierce critic of post-war Keynesian macroeconomic policy. Milton Friedman, the grandfather of monetarism, won the prize in 1976.
After the second world war, practical economists noticed that as unemployment fell in many advanced economies, inflation tended to rise and vice versa. This relationship between inflation and unemployment became known as the “Phillips curve” and seemed to conform with a crude interpretation of the teachings of John Maynard Keynes.
Politicians in the 1950s and 1960s used the relationship to pick an acceptable level of unemployment and inflation. They adjusted taxes, public expenditure and interest rates to pick a desirable spot on the supposed unemployment and inflation trade-off.
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