Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interest, and Assets / Edition 1

by Edmund Phelps

Overview

Dissatisfied with the explanations of the business cycle provided by the Keynesian, monetarist, New Keynesian, and real business cycle schools, Edmund Phelps has developed from various existing strands—some modern and some classical—a radically different theory to account for the long periods of unemployment that have dogged the economies of the United States and Western Europe since the early 1970s. Phelps sees secular shifts and long swings of the unemployment rate as structural in nature. That is, they are typically the result of movements in the natural rate of unemployment (to which the equilibrium path is always tending) rather than of long-persisting deviations around a natural rate itself impervious to changing structure. What has been lacking is a “structuralist” theory of how the natural rate is disturbed by real demand and supply shocks, foreign and domestic, and the adjustments they set in motion.

To study the determination of the natural rate path, Phelps constructs three stylized general equilibrium models, each one built around a distinct kind of asset in which firms invest and which is important for the hiring decision. An element of these models is the modern economics of the labor market whereby firms, in seeking to dampen their employees’ propensities to quit and shirk, drive wages above market-clearing levels-the phenomenon of the “incentive wage”—and so generate involuntary unemployment in labor-market equilibrium. Another element is the capital market, where interest rates are disturbed by demand and supply shocks such as shifts in profitability, thrift, productivity, and the rate of technical progress and population increase. A general-equilibrium analysis shows how various real shocks, operating through interest rates upon the demand for employees and through the propensity to quit and shirk upon the incentive wage, act upon the natural rate (and thus equilibrium path).

In an econometric and historical section, the new theory of economic activity is submitted to certain empirical tests against global postwar data. In the final section the author draws from the theory some suggestions for government policy measures that would best serve to combat structural slumps.

Product Details

ISBN-13:	9780674843745
Publisher:	Harvard University Press
Publication date:	09/01/1998
Edition description:	Reprint
Pages:	440
Product dimensions:	6.38(w) x 9.25(h) x 0.90(d)

About the Author

Edmund Phelps won the 2006 Nobel Prize for Economics for deepening our understanding of the relationship between short-run and long-run effects of economic policy. He is Director of the Center on Capitalism and Society at Columbia University and author of many books, including Inflation Policy and Unemployment Theory, Structural Slumps, and Mass Flourishing.

Table of Contents

Preface

Introduction

Concepts and Agenda

Modern Equilibrium Theory

Contrary Postulates of the Neoclassical Schools

The Labor-Market Equilibrium Locus in Modern Models

The Product-Market Equilibrium Locus and Partial-Equilibrium Unemployment Determination

Capital-Market Equilibrium, Neoclassical and Modern, and General-Equilibrium Employment

Key Factors in the Structuralist Theory of Unemployment Fluctuation

The Closed Economy: Working Models

A Turnover-Training Model

A Customer-Market Model

A Two-Sector Fixed-Investment Model

Synthesis of the Single-Economy Theory

Small and Large Open Economies: Working Models

International Linkages through Investment in Employees

International Linkages through Investment in Customers

International Linkages through Investment in Fixed Capital

Synthesis of the Global-Economy Theory

Microtheoretic Formulations, Modern and Neoclassical

Interest and Wealth in the Microeconomics of the Incentive Wage and Equilibrium Unemployment

Structural Shifts and Economic Activity in Neoclassical Theory

Empirical Evidence

Econometric Tests of the Theory: A Postwar Cross-Country Time-Series Study

A Concise Nonmonetary History of Postwar Economic Activity

Concluding Notes

Notes on Classicism, Etc.

Economic Policies to Which the Structuralist Theory Might Lead

Notes

Glossary of Frequently Used Symbols

Index

What People are Saying About This

An important contribution to economic knowledge-not only offers a new way of understanding long slumps, but also has striking policy implications that are generally overlooked.

Olivier Blanchard

For more than twenty years, Edmund Phelps has been making major contributions, from the workings of the natural rate to the implications of customer markets and of efficiency wages. In this hook, he puts it all together. This will 110 doubt become one of the most important hooks in macroeconomics of the decade.
— Olivier Blanchard, Massachusetts Institute of Technology

Dennis J. Snower

An important contribution to economic knowledge-not only offers a new way of understanding long slumps, but also has striking policy implications that are generally overlooked.
— Dennis J. Snower, Birkbeck College, University of London

Pentti Kouri

This book is nothing less than a complete reformulation of macroeconomic theory, presenting an alternative to both the new neoclassical and the mainstream Keynesian paradigms. Modern themes, heretofore separate developments in theory, are woven together in a sequence of models of compelling clarity and often startling implications: It is not the deviation from the Phelps-Friedman natural rate that is high, but the natural rate itself; contrary to the Keynesian model, welfare-state policies increase unemployment; domestic tax-and-spend policies are contractionary abroad; worldwide deficit spending call be contractionary; high marginal tax rates on labor contribute to unemployment; monetary policy plays little if any sustained role in explaining high real interest rates and high unemployment. These controversial conclusions are supported by empirical tests.

Lawrence Summers

Profound thinking on a profound problem. Every macroeconomist will want to consider Phelps' arguments.
— Lawrence Summers, Under Secretary for International Affairs, Department of the Treasury

Editorial Reviews

Profound thinking on a profound problem. Every macroeconomist will want to consider Phelps’s arguments.

Lawrence Summers

This book is nothing less than a complete reformulation of macroeconomic theory, presenting an alternative to both the new neoclassical and the mainstream Keynesian paradigms. Modern themes, heretofore separate developments in theory, are woven together in a sequence of models of compelling clarity and often startling implications: It is not the deviation from the Phelps-Friedman natural rate that is high, but the natural rate itself; contrary to the Keynesian model, welfare-state policies increase unemployment; domestic tax-and-spend policies are contractionary abroad; worldwide deficit spending can be contractionary; high marginal tax rates on labor contribute to unemployment; monetary policy plays little if any sustained role in explaining high real interest rates and high unemployment. These controversial conclusions are supported by empirical tests.

Pentti Kouri

As a result [of this book], academic thinking on unemployment (which will be followed in due course by popular thinking on unemployment) may be about to undergo its third decisive shift this century… Structural Slumps is addressed to professional economists. They will regard it as one of the most important books of this decade. But brave non-specialists, provided they have a grounding in the subject and are not deterred by the necessary mathematics, can learn a great deal. With luck they will include some of Keynes’s practical men ‘who are usually the slaves of some defunct economist’. Few economists write as lucidly as Mr Phelps; among those toiling at the theoretical frontier of the subject, he is peerless in this respect. And he is unusual in another way…he writes with a sense of purpose. Mr Phelps’s theory, he lets you know, matters not for its elegance or technical ingenuity—though it has both—but for the new light it sheds on a problem that urgently demands a solution.

The Economist

For more than twenty years, Edmund Phelps has been making major contributions, from the workings of the natural rate to the implications of customer markets and of efficiency wages. In this book, he puts it all together. This will no doubt become one of the most important books in macroeconomics of the decade.

Olivier Blanchard

Edmund Phelps’s book is a substantial contribution to the analysis of swings in unemployment from one cycle to the next… [It offers] a wealth of insights into the nature of unemployment.

Financial Times - Mervyn King

Edmund Phelps’s [book]…is likely to shake the establishment. For while much of what the Columbia University economist (now working at the Russell Sage Foundation) has to say about the ‘natural’ rate of unemployment has been alluded to before, his ambitious explanation of long-term joblessness may serve as a license for intervention in an area where fatalism has long been fashionable.

New York Times - Peter Passell

[This] project is one of startling ambition, and the book deserves to be widely read and discussed… [Phelps] amply demonstrates how much turns upon a correct understanding of the macroeconomic consequences of market structure. One can only hope that this first bold effort will stimulate others to follow the trail blazed here.

Journal of Economic Literature - Michael Woodford

An important contribution to economic knowledge—not only offers a new way of understanding long slumps, but also has striking policy implications that are generally overlooked.

Dennis J. Snower

[This] project is one of startling ambition, and the book deserves to be widely read and discussed...[Phelps] amply demonstrates how much turns upon a correct understanding of the macroeconomic consequences of market structure. One can only hope that this first bold effort will stimulate others to follow the trail blazed here.
— Michael Woodford

Journal of Economic Literature

Edmund Phelps's book is a substantial contribution to the analysis of swings in unemployment from one cycle to the next...[It offers] a wealth of insights into the nature of unemployment.
— Mervyn King

Financial Times

Edmund Phelps's [book]...is likely to shake the establishment. For while much of what the Columbia University economist (now working at the Russell Sage Foundation) has to say about the 'natural' rate of unemployment has been alluded to before, his ambitious explanation of long-term joblessness may serve as a license for intervention in an area where fatalism has long been fashionable.
— Peter Passell

New York Times