Edmund Phelps on Unemployment and the State of Macroeconomics
Feb 15 2010

Nobel Laureate Edmund Phelps of Columbia University talks with EconTalk host Russ Roberts about the market for labor, unemployment, and the evolution of macroeconomics over the past century. The conversation begins with a discussion of Phelps's early contributions to the understanding of unemployment and the importance of imperfect information. Phelps put his contribution into the context of the evolution of macroeconomics showing how his models were related to those of Keynes, the Austrian School, and rational expectations. The  conversation then turns to the issue of whether macroeconomics is making progress, particularly in understanding business cycles. The discussion concludes with the satisfactions of work and the role of creativity and dynamism.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Feb 15 2010 at 9:05pm


You are to be commended again on your preparation and interviewing skill. What started rather slowly became quite rewarding. At the opening of the ultimate segment I inwardly groaned a bit in anticipation – not another scholar in some narrow area of an urelated field who decides to dust off an old volume of Aristotle or Hume, or god forbid John Dewey, and draw some banal generalization. However, the conclusion was not that at all. Here was a defense of the industrial (and post-indsutrial) modern capitalistic economy as a part of the ends of human life and not just the means. This seems to incorporate economic liberty and flourishing into an Aristotlean eudaimonian ethics – ultimately contributing to the development of human excellence (and happiness, broadly understood).

Fun stuff.

Feb 16 2010 at 8:25am

I agree. This started slow for a while but became quite interesting around minute 20.

John F
Feb 16 2010 at 10:32am


I dunno: I am still waiting for the predictive value of macro to be explained. I think at one point the learned Prof. said: we have better models now. Yes, but of what value?

Of those in the recent past with whom you have conversed, Robert Higgs, explaining regime uncertainty, is, I suspect, the best guide to understanding “structural” unemployment, better than anything else I’ve heard.

Too, your supplemental comment from P.G. Wodehouse pretty much explains why involuntary servitude reduced unemployment during WWII, and why all else in FDR’s bag of tricks failed.

Institutional arrangements matter, a bunch. And perhaps the macro accurately portrays their effects. How would one apply the “animal spirits” concept in the Gulag? And what’s the optimal outcome? Carbon tax, card check, temporary specific tax credits, agnostic tax policies, and “reforms” dictated by the “better sort” are violations of even Hippocrates’ dictum: first, do no harm to the patient. Oh yeah, with all this in the air, I’m going to buy new property, build, equip, and then hire permanent employees to expand production, Not!! That’s the prevailing “animal spirit”, spontaneous risk aversion.

Viva el Gridlock, and then rescind: don’t “reform”. My money is on micro Higgs.

Feb 16 2010 at 9:15pm

This podcast has given me an idea for a future podcast that I think would be very, very interesting. It would be called something like “Munger on narcoleptic economists who are pre-disposed to filibustering during podcast interviews and the effects on the sanity of the listeners”…. Or something like that.

I think there was some goof information buried in there somewhere but I must be perfectly honest and say that it was far too painful to continue digging for it. I did play the whole thing hoping beyond hope that something would come of it but alas, this was not the best Econtalk ever. I love this whole podcast series and will likely never stop listening to them even when I draw a bad ball once in a while.

Thanks Russ!

Justin P
Feb 17 2010 at 1:47am

I just finished listening and I thought it was a good podcast. Yes it did start slow and finish slow and it was slow around the middle too, but I liked the discussion of Keynesian macro.
I also liked the not so subtle digs at Krugman. It’s nice to see even Keynesians don’t think too highly of him at times. And I have to agree, if people would listen to Keynes’ Econ Consequence of Peace instead of Gen Theory, we’d all be better off.
I think Keynes was a decent man, not the best but not evil. I think his General Theory is popular only because it gives politicians, interventionists and statist an excuse for more and more government spending and intrusion into people’s lives.

Future Podcast suggestion: Sowell on Hayek on Intellectuals and Society.

Feb 17 2010 at 12:14pm

I enjoyed it and learned from it. I don’t get hung up on how people say things, I like to hear what they have to say (though there were a couple times that I thought my iPod stopped working because of the long pauses).

Some of things that I can remember that I found interesting:
– How do we know if a model is good or bad?
– There still isn’t a consensus on the Great Depression.
– Keynes is used as a slogan by people who have never read his General Theory.
– “Friedman was half-Keynesian” – I haven’t heard that one before.

The first two points, seems to me, is all anyone needs to know to be a skeptic of using models to to improve our lives.

I agree with Justin. I’d love to hear Sowell on a EconTalk. I’m currently reading his “Vision of the Anointed” from ’95, which I’m guessing is similar to his latest book and every bit as applicable to today.

Feb 17 2010 at 12:53pm

Russ you should get that sound engineer of yours to edit out all the pauses, stuttering, and “are you there?”!

I really appreciate you bringing someone on who can defend the value of Keynesian thinking while also pointing out its flaws. Great episode.

Juan Carlos
Feb 17 2010 at 1:43pm

I never though a Nobel laureate could be so inarticulate.
A very difficult person to interview

Feb 20 2010 at 2:24am

I am here as someone defending Mr. Phelps, partly. I agree that Edmund is not a good speaker, sorry Mr. Phelps you seem very nice and maybe it was just not your day. That being said I actually felt more of an affinity for Phelps point of view than many people and many of your guests. I would like to remind people that eloquent speech does not necessarily mean logic and intelligence. Similarly slow, stilted, or awkward speech does not mean poor ideas or logic. I bet there are people who have expressed just as, or less, coherent arguments on Russ’s show that have been praised for the way they present it.

John F,

I think Phelps is trying to say something that I happen to sympathize with greatly. He seemed to me to be saying that you have to keep an open mind, that over the years people, including Higgs and Wodehouse, come up with models, narratives and explanations. The great thing about today is that we not only have access to all the old models but new ones as well, as people come up with different insights and new ways to look at things. The world is after all complex and information is imperfect so it is best to carry around a tool box of models as an economist in order to attempt to see situations and problems from various angles. As information is incomplete and imperfect, it is unlikely that any one person has the whole story, or a complete view or model.

You may think that Wodehouse and Higgs pretty much “closed the case” on structural unemployment and WWII respectively, but for me it is important to realize that they probably don’t have the whole story and to be open to different models. Personally (and this can be a detriment at times) I am rarely more than 60-70% sure that I’m right about any given topic that I think is settled for me at a time.

Justin P,

I think it is interesting that you call Phelps a Keynesian. I am not very acquainted with his work but it seems to me Phelps expressed just as much sympathy for Hayek as he did Keynes, not to mention others, and he didn’t seem terribly intrenched in either view point too whole-heartedly. This seems to me an interesting phenomenon among libertarians (especially Austrian school), either you’re with ’em or you’re against ’em. Either you are full bore anti-government Hayekians, or you must be a Kaynesian. For some economists, and lay people, it almost seems like Keynesian is the econ-speak version of red-baiting. “Are you, or have you ever been a Keynesian?” Some arguments I’ve had sometimes fall along these lines, where ANY questioning of anti-governtment, Fed, etc. activities results in being called a Keynesian.

I would also gladly listen to a podcast with Thomas Sowell again, I am a handful of chapters into “Intellectuals and Society” and I must admit I have yet to find much at all redeeming about it. I am a recent newcomer to his work, but I have yet to find much to get exited about and wonder why libertarians like him so much. He seems to hold many anti-libertarian perspectives and the few insights I have heard don’t seem that fresh or new to me and the rest poorly argued and supported… but maybe I just need to give it time.


I’m surprised, I have heard austrian folks call Friedman an outright, or back door Keynesian (nothing too half about it). Although I think this is silly (again it’s not like there are only two camps Keynesian and Austrian), there is a kernel of truth to it that many monetarists seem scared to confront.

I too wonder how many people have read Keynes on either side of the issue. I have read some brief excerpts of the General Theory, that’s it. It seems like many people like to talk about Keynes, Adam Smith, Thomas Paine, etc. that I am skeptical have even read there works. I wonder if a poll could be conducted to see how many Austrian school anti-Keynesians have even read much of his work. And I know the General theory is difficult (hell the Wealth of Nations is difficult to get thru, at least for me, as well) but that is not really an excuse, especially for people who claim to dislike his ideas so vehemently.

Jim Labbe
Feb 20 2010 at 5:44am


I agree, great job at interviewing a difficult individual to interview.

But I have to question the emphasis, concern and focus on these unnamed public intellectuals who don’t understand or haven’t read Keynes and who lazily invoke him to wrongly justify policies that may or may not have much better justifications.

Are these public intellectuals more a threat to freedom and the free exchange of ideas than those public intellectuals (if we can call them that) that brand any Keynesian public policy as socialism?

I would say the latter case is much more common in public discourse.

If the goal here is economic literacy than I am surprised that this intellectual laziness (or out out-right propaganda) didn’t get at least some comment by either you or Phelps.


arc of a diver
Feb 20 2010 at 7:59am

Phelps: “After break, another guest came on, Robert Reich, Clinton Administration. Said, “Most people in the United States hate their jobs.” Staggered and annoyed. What he said is not borne out by the data. By far the majority are highly or fairly satisfied in their jobs.”

PEW Research says 90% of Americans are “satisfied” with their jobs. This is much higher than Japan at 60% but close to the UK and Western Europe at 85-90%.

What do I know?
Feb 26 2010 at 6:45am


Yes, the interview did start off slowly, not your fault. I almost shut it off but endured and was pleasantly surprised. Another excellent podcast that again shows your ability to get people with diverse opinions to open up to you and say things they might not otherwise feel comfortable saying elsewhere. You have a gentle non-threatening approach yet you still manage to ask the right questions and better yet, get them answered by people that may not share your personal views. Yes there were long pauses, but that allowed you to listen while allowing a thinking intellectual to formulate his thoughts before speaking. Thanks again! On another note I would love to hear a podcast discussing the Triffin Dilemma. I think it would create a better understanding of the bog we’re in.

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Podcast Episode Highlights
0:36Intro. [Recording date: February 12, 2010.] 2006 Nobel Prize winner in economics, Edmund Phelps. Paul Samuelson's 1948 Foundations of Economic Analysis was beginning of formalization of economic theory into mathematical form--took it to a new level. Quote from Phelps's Nobel Prize lecture:
Samuelson's project to correct, clarify and broaden the theory brought into focus its strengths; but also its limitations: It abstracted from the distinctive character of the modern economy--the endemic uncertainty, ambiguity, diversity of beliefs, specialization of knowledge and problem solving. As a result it could not capture, or endogenize, the observable phenomena that are endemic to the modern economy--innovation, waves of rapid growth, big swings in business activity, disequilibria, intense employee engagement and workers' intellectual development. The best and brightest of the neoclassicals saw these defects but lacked a micro-theory to address them.
How did your work on unemployment began to address these problems? Not sure that it did in first year. Started trying to create abstract models cast in terms of equations had to make a zillion choices about what to assume and not assume. Very natural to reject the idea of perfect foresight about the future. Had done some work on that vein, but when working on unemployment starting in 1966, wanted to get more realistic. No breakthrough way of capturing how people thought about the future, but simply wasn't willing to impute to a knowledge of the consequences of their present decisions for the future. Became increasingly conscious from 1966-1970 that this was important; would hardly be able to talk about the major sources of business fluctuations if I were to put on the jacket of perfect foresight. Do you think the Rational Expectations approach was a dead end--a wrong way to go? In 1966 the term "rational expectations" didn't exist; we didn't have much in the way of mathematical models that look like statistics, with probabilities--some models like that. Didn't think of self as being some extraordinary deviant from rational expectations. Knew of Walras, Knut Wicksell, later Swedeish economist, Irving Fisher--knew there were important figures who had imputed knowledge of the future to economic models; but there were also people like Frank Knight at U. of Chicago who thought the future essentially uncertain and every businessman knows that; and Friedrich Hayek. If something is new, how could anybody know? John Maynard Keynes also emphasized that innovative projects depend on a person's animal spirits. Choice--could go with classical people or modernists; temperamentally attuned to the latter group.
8:14There was a lot of other work going on at the same time. Rational expectations rage came toward the end of the second half of the 1960s. John Muth, first or almost first to talk about it explicitly. People of course don't know exactly the future, but they know the probability distribution that governs the future. They don't know which ball will be pulled out of the urn, but they know what's in that urn. In the 1970s, some of Phelps's work survived and was drawn upon, but some viewed as flawed as not having introduced rational expectations. Something close to perfect foresight. In the 1960s--irony--unemployment was very low; by the end of the 1970s it was very high. There was a belief that our models, certainly our equilibrium models of the labor market, were not performing in a very satisfactory way. What was different about your models? How do you look at labor market and unemployment? As economics became more and more mathematicized, it became more and more standard to think of each market as having a price that cleared the market. There was no excess demand and no excess supply. Differed from that--argued that companies have an incentive to set their wages above the market-clearing level--for their own self-interest. Didn't rationalize very well right away, but eventually saw what was going on. Equilibrium in the sense of no one being surprised by what others are doing is characterized by involuntary unemployment that comes from companies having a sense of self-interest in keeping their wages up and their quit-rates down. Wanted to give employees something to lose if company did badly. Hardly emphasized in succeeding literature. Brought unemployment back into the picture. Other thing in work in the 1960s--if people get fooled, if each firm doesn't realize that other firms have the same incentive, then wages will be less high than they would have been if the wage-setters knew what was going on; and employment would be lower than if they understood. Emphasizing stop talking about equilibrium so obsessively; we can be out of equilibrium; and if we are out of equilibrium then sooner or later the information will come out that shows people are wrong and they will react to that. So wages are going to pick up, rising faster; prices will rise faster; start to get clear inflation. Not trying to predict the 1970s, but did realize that the unemployment rate was extremely low in the last half of the 1960s; had to explain to self how this could be; answer was that people didn't know what was going on and out of equilibrium but inflation will turn up--just you wait. More complicated than that. Uncertainty not just in the future but in the present--not sure what's happening right now. Medieval economy you know all the people you are working with, see the transactions; in modern economy, knowledge is very costly. Spread out, geographically, physically. If everybody's working in the manor, self-sufficient. Once you get globalization or a national market with specialization then people have a hard time understanding what's going on.
15:47How did those insights interact with the Keynesian idea of aggregate demand? Didn't start out to try to unseat Keynes. Trying to provide a microeconomic foundation for the basic idea of Keynesian economics. Trying to show if aggregate demand increased, the effect would not be simply a momentary increase of output and unemployment until people caught on, but rather there could be a prolonged period in which output and employment are elevated relative to the equilibrium path. Wasn't being anti-Keynesian; taking Keynes fully on board and trying to make sense of him. But a natural consequence of argument was if the monetary authorities tried to maintain output and employment at its elevated level, by pouring more and more money into the economy when money wages and prices were pushed up, then people will begin to anticipate when price and wage increases in the future in the economy; so that won't work. Attempt to kind-of legislate a disequilibrium on the part of the Central Bank won't work. Very upsetting to Keynesians. Probably not as hated as Milton Friedman, but might have been hated more because Friedman was never in the Keynesian camp, but Phelps was thought to have been a Keynesian. Friedman doing something similar with attack on the Phillips Curve and Central Banks. Thought he oversimplified. His strength and his weakness was that he oversimplified a lot.
19:17Naive question, as a micro guy: strange schizophrenia between micro and macro. In micro we like to say markets clear; in macro, strange disequilibrium in the labor market. But in both micro and macro same disequilibrium--don't think of it as disequilibrium per se. If you go into a grocery store there is lots of stuff on the shelves when you leave, and cars on the lot at the auto dealer. We don't say this market is in disequilibrium because there is all this unsold stock. Why don't we just say they should lower their prices and sell everything? Inventories are there because future demand is uncertain. Disappointing a customer is really to be avoided. We don't expect those markets to clear in a textbook way; understand there is a richer story. Isn't that what is going on in the labor market, that it's costly? No. Why? Also want to make clear that a car that doesn't get sold doesn't have a family to feed, so there is a different social aspect. Not ready to put you in jail! The story is essentially a story about a kind of stochastic equilibrium. There are ups and downs in the volume of business from day to day. Some days end up with a smaller number of cars less in the lot than you would have guessed. Perfectly possible to build mathematical models in which there are probability distributions that govern whether somebody gets up in the morning and goes to a used car lot. Can build a model in which a precautionary stock of cars is kept in used car lots: if you don't have one there you can't sell one. Sense in which everyone would have liked to have sold more cars and nobody can predict the number of cars that are actually sold. That story in its usual version usually slip quickly into the thought that everybody knows these probability distributions and we are just looking at a stochastic process. Carry that over to the labor market--people lose their jobs, so they then go look for another one; there are some frictions, but you are always in a kind of stochastic equilibrium. Concede the grain of truth in that story; it's just not the kind of story I'm interested in. As a macroeconomist I'm interested in the story in which something happens to cause the whole industry to be off, to get it wrong. For example, there could be some kind of obscure monetary development that causes people to want to reduce their bank holdings and load up more on things for the refrigerator and so on. There are macro shocks that are not quickly identified that catch people having wrong expectations in the sense of not having probability distributions in their mind that are the right ones. Russ: I totally agree; let me ask the question a different way. In the current world, right now, where unemployment is about 10%, some recently unemployed, some for a long time, some receiving unemployment compensation which is not pleasant but beats having nothing. When you are unemployed, there are lots of jobs available, but what you don't know, which is like what the producer doesn't know what the price and wages offered by competitors are--if you are out of work and you are offered a job that pays less than what you were paid before, you don't know whether that's your best alternative or just a bad draw out of the urn. You wait, because there's a cost to quitting that new job, if it turns out you were wrong. Seems that that process is a massive part of why there is measured unemployment at all, but in particular why during a downturn unemployment persists. Wouldn't call that a disequilibrium. Everyone being rational. Don't think of anybody as being irrational. All doing the best they can. If the bottom drops out of the housing market and a lot of construction workers find themselves unemployed then even if there will be some sort of adjustment of prices and wages that will bring the economy back to the same level of activity, it's going to take a while for round pegs to find round holes and square pegs to find square holes. Absolutely fine. Non-Keynesian story about employment, unemployment, persistence, and so forth that wasn't addressed by Phelps's work in the 1960s. Was just addressing the prevailing view. Also more structuralist views that say when there's a shock it's not the same across the board for every company. Some companies are different from others; some industries have different experiences. Maybe downturn concentrated in construction industry. In last 20 years spent all my time on that!
28:38Russ: Observation was not made as a criticism: Chicago-trained, Lucas student though dissertation in micro. But in recent years become more interested in Austrian approach, where imperfect information important and structural changes important. Can't just look at aggregates. In current downturn, 22.6% of jobs lost since beginning of recession in construction. If you are a construction worker, it's very hard to figure out if your job is coming back in six months, two years, or never. Smartest person in the world doesn't know the answer to that question, let alone the average construction worker. That Knightian uncertainty, inherent in Phelps's methodological approach. At the end of the 1980s, world didn't look very Keynesian any more. Tremendous depression in Europe, with unemployment rates of like 15% in the middle of the 1980s. Just hung up there. No deflation or disinflation. Wait a minute--we need to find a structuralist story to understand this kind of thing; worked on that from 1986-2000. Back up for a second: why did that lack of an inverse relationship between unemployment and prices--why was that a challenge to the Keynesian model? Keynes had left the whole behavior of money-wage rates something of a puzzle. Not that he didn't it some thought. Then Phillips came along with the Phillips Curve, which said not that when employment is high workers ask for a high level of the wage, but rather than when employment is high or unemployment is low, we see money wage rates rising faster than if employment is lower. The higher the level of employment, the faster money wage rates are rising. Keynesians embraced this as the solution to their problem of what to do about wages in their models. Phillips' paper in 1957 or so, there grew up a kind of Keynes--Phillips' model. Implied that you would have money wage rates rising a lot slower than before in Europe or even falling. But they weren't. This was a kind of downturn the Keynesian model had nothing to say about. Started working on modeling of determination of the natural unemployment rate itself, with an eye to trying to understand the European phenomenon in the 1980s. Wealth, real interest rates, and real exchange rates--variables you would have had in a non-monetary model--impact on the natural unemployment rate itself. Clue as to reasoning by recalling Milton Friedman. Friedman was more of a Keynesian than he ever wanted to admit. Sort of a half-Keynesian. He said something like this: If you have a decrease in demand--decrease of investment demand, decrease of export demand, whatever--in an open economy, then you could look to money wage rates to solve the problem. Or it might more or at least as convenient to look to the exchange rate to solve the problem. When investment or export demand weakens, that would lower interest rates; that would cause the currency to drop. Where will the currency hit bottom? Will keep on falling until demand is back up to where it was before, employment is back up to where it was before. Why? Because that's what has to happen for the interest rate to be back to where it was before. Interest rate in this country has to be the same as it is in the rest of the world. Keeps on falling until the economy has healed itself fully. Otherwise that market will be in disequilibrium, capital will flow across borders. There was Friedman using impeccable Keynesian reasoning but reaching a non-Keynesian answer. Yes, there is unemployment for a while, but the wage-price mechanism will operate to bring the world back to equilibrium. Implicitly supposing what so many Keynesians suppose: namely that the structure of demand doesn't matter. Just aggregates. In Phelps's models of the late 1980s, at least those that had exchange rates in them, that's not true. When the exchange rate falls, that's like an increase of tariffs. Domestic firms now protected against foreign competition. They will respond by raising markups. Prices will rise relative to wages, which is like lowering wages relative prices. New equilibrium is not where it was before. New equilibrium is lower than it was initially. Real exchange rate depreciation has this little negative in it that is always overlooked by the people who see real exchange rate depreciation as a salvation. Two sector stories sort of the same thing--when you have a real exchange rate depreciation, that's tantamount to a decrease in the relative price of nontradeables. Structure is not neutral.
39:38Observation, then shift gears. Conversation reminds of how difficult macro is. Start off asking suppose demand decreases. For a particular thing. Investment demand, export demand, consumer demand. Nothing is exogenous. Have to ask: Why? Why did it decrease? Not just structural question of which. But you've got to start somewhere. Stuff happens! If you want to start with the premise that it's a deterministic world and everything is known, then nothing can happen except random disturbances. You can get a certain distance with that; have played around with that, not criticizing anybody. Making a different argument: we as outside observers don't know why demand fell. Really hard to do comparative statics--what are we holding constant? Something must have changed, might be random, but it's probably something we didn't observe or didn't understand that changed this. As a result our ability to predict this is very limited. Are you saying that, say, when investment demand changes, we better know why else our analysis is incomplete? Yes. Constant, hanging over so much of what we do, always one more step. But one step at a time. Methodological question, especially for nonacademic listeners--I put this in my model, Friedman put this in his model or left that out--what do you think our ability is to distinguish between good models and bad models and how should we do that as economists? "I never saw a model I didn't like." Don't believe in good models and bad models. Carry around a tremendous repertory of models--Austrian, Keynesian, Marshallian, Lucas, Sargent, Prescott--six or seven models of my own which I sometimes get tangled up. If you study the price of peas and the output of peas you might be able to get through your career with just a Marshallian model. You can't get anywhere in macroeconomics with just one model. Just doesn't work. Do we make any progress? Sure. New riches in the form of new models we didn't conceive of before. Almost a witness--student of economics in the autumn of 1952, only 16 years after Keynes's General Theory came out. Could go to the college library and read the debates between Keynes and Hayek, only 20 years earlier. Witness to that, and witness to American Keynesianism, which differed profoundly from Keynes because the Americans took the uncertainty out. Took the lack of knowledge out of Keynes. The math went a lot easier, was more beautiful. If you just took Keynes's marginal efficiency of capital, which was a subjective thing, and plopped it down, then it made it obvious there was something curious there. Americans didn't like that, so they got rid of it. Arrival of Phillips; participated in debate about Phillips Curve and permanence of shift in aggregate demand; built structuralist models in which the natural rate of unemployment is constantly moving around. Now having a revival of Austrian style models, financial crisis--not only do we all have imperfect knowledge but we have disagreements. Some people were bullish, some bearish. Some made money--not many--many lost money, wonder why. Macroeconomics has been a roller coaster of discovery and reappraisal and fights.
47:19Russ: That's my question. When I was in grad school in the 1970s, we were taught, 1976-1980, at Chicago, so definite emphasis there, nobody took Keynes seriously, emphasis on real business cycles, what stochastic shocks or real shocks were causing the business cycle. Focus on rational expectations--that was the hot topic. Some problems developed with those models, but they looked kind of interesting and promising. Great Moderation. But now we are back to Square One. Not only didn't learn any Keynes, but didn't learn any Austrian theory. Nobody took that stuff seriously; could be back, not sure. More like a roller coaster than a slow steady accumulation of knowledge. Keynes is back too--in vogue. No--don't go back to exactly the same place. The Chinese say a man never crosses the river in the same way twice. We could never go back to the Keynes of 1936. We know too much, would be second-guessing. But it's an extraordinary book by an extraordinary mind, influential. To forbid it like Lady Chatterly's Lover is pretty ridiculous and atrocious. Rational expectations was a casualty. We know it was no good. Conference in 1981, Individual Expectations and Aggregate Outcomes: Rational Expectations Re-examined. Went through models where people disagreed or even think they disagreed. Had challenges to rational expectations, just as Oskar Morgenstern challenged the work on intertemporal equilibrium in the late 1920s by Hayek. Caused Hayek to have a change of heart. Rare for any academic. Didn't advertise it.
51:25How do you evaluate good models or bad models? A lot of things are back in play. You may say the Keynes of 1936 dead, but his insights relevant; but a lot of what I hear from public intellectuals is that it's relevant. Reading the wrong newspaper! Could be. Pick up the Financial Times and you will see much more diversity of opinion than you will in some family newspapers. Real point: no matter how sophisticated or open-minded, with horse in the race, hard to evaluate each unique-each-time crisis. Not a lot of data points. Great Depression, current recession, a lot of little recessions. Hard to know. Any evidence that we are better? We've rejected some things. We have rising cumulative knowledge. Some of us remember Hayek I and Hayek II and Keynes and the American Keynesians and the Friedman/Phelps perspective and Rational Expectations revolution, and the structuralist stuff and the critique of rational expectations with Roman Friedman who has done some of it with me. I remember all those things, so I feel incredibly richer. Probably others don't. I actually wonder whether so-called Keynesians these days have actually read Keynes's General Theory. I think they haven't, otherwise they wouldn't say some of the things they say. Other point is that--this comes profoundly back to Hayek and imperfect knowledge, particularly of the future and uncertainty--every big crisis like this is not only out of the blue. They always are. Each one is in important ways quite different. The world has changed quite a bit. We're not just going through something like the Great Depression of the 1930s where this slump is different in important ways. On the other hand, probably the present slump is more different from the garden variety of recessions we had after WWII than it is different from the Great Depression of the 1930s. Now we are discovering more stuff about the financial sector, which has evolved enormously in the space of two or three decades. That's something different. Globalized economy in which the United States is producing only a quarter of the output, not something like almost half in the decade or two after WWII. And so much more freedom of goods, freedom of capital. The rules of the game have changed so much. Everything has to be re-thought. We never got consensus on the 1930s either! This sounds like a slam but it's not: a lot of what we tell is ex-post story-telling. What we are best at; in search of knowledge. A lot of things different now, so we can't just apply the models we had in the past. I hear you, but I think economists tell better stories than economic historians do. Economic historians, general public, very crude stories. We need stories to help us avoid making the same mistake twice. Other thing: We need economists who are gifted with a lot of insight and theoretical imagination to be involved in policy discussion. If we don't have that component, societies are going to be the poorer for it. Britain had Keynes, and he probably did more good than harm. Wasn't always clear; had to change his mind at some times; and that's okay. Intellectual caliber of his thought was generally better than what was coming from the others. We have to.... A lot of these public intellectuals you referred to are using slogans, like "Keynesian economics" like it's a slogan to mean one thing one week, another thing another week. Could mean a pro-active stance, could mean nothing more than that; or could mean a big public sector is better than a small public sector. For some people it means that. A lot of these public intellectuals are doing a lot of harm to the quality of the discourse.
1:00:00Ironic that Keynes's most important insight wasn't listened to: Economic Consequences of the Peace. Treaty of Versailles. Insights into what you call the Good Life, the workplace, and what we understand about that. Have to resist the temptation that I invented it. Don't have much time to read any more, but like to ask myself what previous guys said and thought. Trying to put into my own words some thoughts about the good life in a lecture in Munich in 2003. By some accident had to give another version, 12 months later in New York. Realized at some point that distilling point of philosophers read in college. Didn't read Aristotle; had read Plato, had to scramble to go back. Had read David Hume, so great on knowledge and how tricky our knowledge is; need for imagination. Profound effect. Read Henri Bergson; didn't realize that Bergson was to some extent doing a version on Nietzsche; didn't read Nietzsche. Also read William James. Late 19th century headline thinkers had a lot to say about change, adventure, curiosity, and how we change in the process of all that. John Dewey on that same wavelength, Columbia 1920s-30s. People go to work to make a boat, got to have things to enlist their minds. Why talking about this good life? Idea in background was that this conception of the good life could maybe be justification for an entrepreneurial capitalism, such as we thought in the year 2003 in the United States, with still-fresh memories of the Internet revolution. Now it looks like there is a lot less innovation and entrepreneurial spirit than we thought there was. But in 2003 thought that it was important to celebrate the excitement, engagement, adventure; thought it was a new way of defending capitalism. Previous theorists had thought that well, it was a good way, good system for capital formation, building up the capital stock. Nice to get rich. But there are countries in Europe that don't have any of the innovativeness, the flair, the excitement of American capitalism, and they've got awfully high levels of wealth. Can't say that you have to have capitalism to be rich and comfortable. What's your thought now? Still optimistic about that entrepreneurial spirit? We've lost some of it, but we can get it back, and we'd better get it back because we want this good life. Also, further point: if you have an economy with a lot of dynamism--meaning opportunities come and go but if you are equipped for innovation you are better off--you want to be equipped to innovate when ideas strike for another reason: It's good for employment. And high employment is good. Earning your own way in life, not being a burden on the public trough; want children to grow up with parents who are role models of having careers. Society is healthier if employment is higher, particularly if economy offers challenging jobs. All intertwined. If you have an economy of that quality, also get side-benefits like high employment.
1:09:04There's never been a society in human history like the United States today--even today with unemployment--there's never been a time when creative people could use their creativity in extraordinarily exuberant and satisfying ways. Incredible environment for that psychologically satisfying human experience. Worry about whether that's easy for me to say because I'm enjoying that, podcast, creative things in job. But people who are self-employed and doing things they love, creative things from health care to iPad, seems like all-time high. Worried about that almost from beginning of writings about this. Dirty, mindless, grimy, unrewarding jobs taken only for the money. Recognize that. But at the same time, reject idea that almost across the board except for this hard core of creative, imaginative people, that jobs are dreary. Radio debate one day on NPR; thought by self, carrying on work and importance of challenge. After break, another guest came on, Robert Reich, Clinton Administration. Said, "Most people in the United States hate their jobs." Staggered and annoyed. What he said is not borne out by the data. By far the majority are highly or fairly satisfied in their jobs. People love being in the thick of things, love being in a company that is aspirational. People want to have that involvement. Not everybody gets to invent the iPod. We can't all be Steve Jobs. But some is a trickle-down thing. Someone once said: In a highly entrepreneurial environment, even the waitresses show more hussle and are more interested--that becomes the culture.