Edmund S. Phelps

INVESTMENT IN HUMANS, TECHNOLOGICAL DIFFUSION AND ECONOMIC GROWTH,

Most economic theorists have embraced the principle that certain kinds of education—the three Rs, vocational training, and higher education—equip a man to perform certain jobs or functions, or enable a man to perform a given function more effectively. The principle seems a sound one. Underlying it, perhaps, is the theory that education enhances ones ability to receive, decode, and understand information, and that information processing and interpretation is important for performing or learning to perform many jobs. This chapter focuses on the economic growth theory, which has concentrated on the role of education as it relates to the completely routinized job. In its usual, rather general form, the theory postulates a production function which states how maximum current output depends upon the current services of tangible capital goods, the current number of men performing each of these jobs, the current educational attainments of each of these jobholders and time.

Money-Wage Dynamics and Labor-Market Equilibrium

This chapter discusses money-wage dynamics and labor-market equilibrium. A generalized excess-demand theory of the rate of change of the average money-wage rate has been developed for frictional labor markets that allocate heterogeneous jobs and workers without having perfect information and market clearance by auction. There are two explanatory variables: the vacancy rate and the unemployment rate. The unemployment rate and the rate of change of employment are shown to be joint proxies for the vacancy rate. Hence, generalized excess demand can be regarded as a derived function of the unemployment rate and the rate of change of employment. This relationship is the augmented Phillips curve. Some of its properties are deduced. Equilibrium entails equality between the actual and expected rates of wage change. The steady-state equilibrium locus is implied to be a vertical line at a unique steady-state equilibrium unemployment rate. This is consistent with the usual theory of anticipated inflation. But if there are downward money-wage rigidities, then, up to a point, every one percentage point increase of the expected rate of wage change produces less than a one percentage point increase of the actual rate of wage change. The steady-state equilibrium locus will then have the characteristic negative slope of the Phillips curve in the range of large unemployment rates. But at sufficiently small unemployment rates, equilibrium is impossible and under the adaptive expectations theory, an explosive hyperinflation will result.

On Second-Best National Saving and Game-Equilibrium Growth

This chapter highlights the question whether second-best saving is greater or smaller than first-best saving when given future saving is non-optimal from the standpoint of the present generation. The chapter presents the postulation that all generations expect each succeeding generation to choose the saving ratio that is second-best in its eyes. This somewhat game-theoretic model leads to the concept of an equilibrium sequence of saving-income ratios having the property that no generation acting alone can do better and all generations act so as to warrant the expectations of the future saving ratios. The chapter presents a comparison of this equilibrium and the first-best optimum. The concept and calculation of the second-best optimum is of interest even if that analysis does not explain actual national saving because society as a whole has no notion of such an optimum.

Stabilizing Powers of Monetary Policy under Rational Expectations

The potential of monetary policy to stabilize fluctuations in output and employment is demonstrated in a stochastic rational expectations model in which firms choose, considering average profitability, to set prices in advance of the period when they apply to goods sold. This lead time in pricing decisions increases the fluctuations of output about the normal employment level. But proper use of a feedback monetary policy rule can reduce these fluctuations even though expectations are rational and people know the policy rule. It is noted that use of a rule-dictated policy sometimes requires the monetary authorities to penalize the economy in the short run for the sake of beneficial system effects of the rule upon the relevant steady-state distributions.

INFLATION IN THE THEORY OF PUBLIC FINANCE

What are the essential features of the thought-experiment one has in mind when he speaks of the “tax-like effect” of an increase in the anticipated rate of inflation? Various authors have had various experiments in mind and thus arrived at differing measures of the revenue from inflation.

THE GOLDEN RULE OF ACCUMULATION: A FABLE FOR GROWTHMEN

This chapter presents an understanding of Solovian growth and the economic growth issue. It discusses the way in which a brilliant peasant named Oiko Nomos claimed a prize for optimum investment ratio. The Solovians were deeply impressed by Oiko and his theorems. Oiko suggested that associated with the golden-rule path is a unique capital–output ratio. If ones present capital–output ratio is smaller, then consumption must be slowed until the ratio is no longer deficient. If the present ratio exceeds the golden-rule ratio, then consumption must be made at a fast rate until the capital–output ratio is no longer excessive. The chapter discusses the way in which the kingdom followed the golden rule of accumulation.

The New View of Investment: A Neoclassical Analysis

The basis of investment pessimism, 549. — The new view, 551. — A simple model of growth, 553. — Investment and productivity in the long run, 555. — Investment and productivity in the short run, 560. — The rate of return on current investment, 563.— Summary, 567.

Disinflation without recession: Adaptive guideposts and monetary policy

ZusammenfassungInflationsbekÄmpfung ohne Rezession. — In dieser Arbeit wird das Theorem begründet, da\ ein einziger Pfad der Kontrollvariablen für die Gesamtnachfrage — hier der Geldversorgung — existiert, auf dem die Verminderung der Inflation auf das erwünschte Niveau vorgenommen werden kann, ohne da\ die BeschÄftigung auch nur zeitweise von der »natürlichen Rate« abweicht — und das trotz gestaffelter und deshalb sich überlappender Lohnabschlüsse ohne Indexbindung mit fester Laufzeit. Der Beweis ist abhÄngig von dem Postulat perfekter Voraussicht in bezug auf die Entwicklung des durchschnittlichen Lohnsatzes und der Geldversorgung. In der Praxis würde der Erfolg eines solchen Programms zur InflationsbekÄmpfung die Einrichtung von Lohn-Leitlinien erfordern, die die Erwartungsbildung erleichtern.RésuméUne desinflation sans une récession. — Cet article établit un théorème de l’existence d’un sentier unique de la variable de contrÔle d’agrégat-demande, ici l’offre d’argent, qui atteint à une réduction du taux d’inflation sur le niveau prescrit sans mÊme une déviation temporaire d’emploi du taux «naturel», malgré de la présence des obligations de taux de salaire échelonnées et c’est pourquoi chevauchantes d’un type pas indexé et avec une durée fixée. La démonstration dépend du postulat de la prévoyance parfaite regardant le cours du salaire d’argent moyen et de l’offre d’argent. En pratique, le succès d’un tel programme de desinflation rendrait nécessaire une structure de terme des postes de guide de salaire comme aide en formation et des expectatives.ResumenDesinflación sin recesión. — En este artículo se establece un teorema sobre la existencia de una trayectoria Única de la variable de control de demanda agregada, en este caso la oferta de dinero, que alcanza una reducción de la tasa de inflación al nivel prescrito sin siquiera una desviación temporal del empleo de la «tasa natural», a pesar de la presencia de promesas de tasas de salarios escalonados y traslapados de un tipo sin indexisación y de duración fija. La demostración depende del postulado de perfecta previsión con respecto al curso del salario monetario promedio y de la oferta de dinero. En la práctica, el éxito de un programa de desinflación de este tipo requerirá una estructura de condiciones indicativas para salarios como ayuda en la formación de expectativas.

Commodity-Supply Shock and Full-Employment Monetary Policy

If one or more unanticipated disturbances should cause the expectation of a lengthy contraction of commodity supplies, what quick adjustment of the money supply—failing a quick adjustment of money wage rates—would be required to maintain the normal volume of employment or whether the monetarist course be best suited to avoid both the Scylla of underemployment depression and the Charybdis of overemployment wage inflation. This chapter presents a formal analysis of this theoretical question. It discusses a closed economy producing a single final good with attention to traditional matters of capital, inflation, and interest. The supply shock is represented by a permanent decline in the supply per unit of time, to be denoted σ, of some raw material consumed in the production process.

The concept of optimal taxation in the overlapping-generations model of capital and wealth

Abstract The optimal fiscal program of the present generation may be conceived as maximizing the social welfare of that generation subject to a capital-accumulation quota and a wealth-accumulation limit (the difference being the stock of public debt). The standard methods of optimal tax analysis are shown to be applicable to the multiperiod generation if (1) the capital-wealth target is Pareto efficient in the sense that no other target would permit a mutual welfare gain for the present generation and the next, and (2) the government ‘budget constraint’ specifies an algebraic budgetary deficit consistent with the attainment of the target. Important results on interest-income taxation are derived.