Phelps, Edmund: January 2008 Archives

Nobel Prize winner Edmund Phelps will present the Hayek Lecture at the University of Vienna today, Tuesday, Jan. 29th hosted by the Hayek Institute.  Details can be found here.  The title of Dr. Phelps' talk is "Hayek and the Economics of Capitalism - The Road back from Welfare State to Liberty and Economic Growth."

In 2006, just prior to winning the Nobel Prize, Phelps wrote a paper titled, "Further Steps to a Theory of Innovation and Growth - On the Path Begun by Knight, Hayek and Polanyí."  (pdf file)

Other recent papers by Edmund Phelps can be found here.  Phelps is the Director of the The Center of Capitalism and Society.

UPDATE:  Hayek's ideas feature prominently in Phelp's 2006 Noble Prize lecture (pdf):

Innovativeness raises uncertainties. The future outcome of an innovative action poses ambiguity: the law of "unanticipated consequences" applies (Merton, 1936); entrepreneurs have to act on their "animal spirits," as Keynes (1936) put it; in the view of Hayek (1968), innovations are launched first, the benefit and the cost are "discovered" afterwards. The innovating itself and the changes it causes make the future full of Knightian uncertainty (1921) for non-innovators too ...

Innovativeness also transforms jobs. As Hayek (1948) saw, even the lowest ranking employees come to possess unique knowledge yet difficult to transmit to others, so people had to work collaboratively ...


At Yale and at RAND, in part through my teachers William Fellner and Thomas Schelling, I gained some familiarity with the modernist concepts of Knightian uncertainty, Keynesian probabilities, Hayek's private know-how and M. Polyáni's personal knowledge. Having to a degree assimilated this modernist perspective, I could view the economy at angles different from neoclassical theory ...

The other severe limitation of the research view was, of course, that business people are the conceivers of the bulk of the innovations of a capitalist economy.  Capitalism is Hayek country. In such an economy, Hayek says, there is a "division  of knowledge" among different persons - not only dispersed information  ("knowledge of current prices") but, crucially, dispersed know-how about "how commodities can be obtained and used."31 (Hayek, 1937). Hayekian entrepreneurs are constantly striving to expand their knowledge into some area where knowledge is scarce or non-existent in order to see whether they might develop something commercially saleable that no one else has conceived before. This is creativity - acquiring ideas that no one else has (or likely will have without doing the necessary exploration). Later he sketched a model of how the entrepreneur, not really knowing its commercial value, has to launch the innovation on the market to "discover" its value, if any32 (Hayek, 1968).

I have tried in recent years to elaborate and apply Hayek's theory of innovation. A recent paper formalizes the theory of innovation with the theoretical device of a periodic fair in which entrepreneurs and financiers meet and enter into matches despite incomplete information (Phelps, 2006b). I have also been fortunate in coming up with some empirical findings: The presence or absence of important financial institutions, such as the stock market, appears to be quite important for the readiness of an economy to seize an
innovative opportunity (Phelps and Zoega, 2001). Furthermore, various attributes
of a country's economic culture serve to animate entrepreneurs and, more broadly, to encourage them by offering them a willing workforce and a receptive marketplace for their innovations. (Phelps, 2006c) (See Tables 1, 2a, 2b and 3.) The direction in which I have mainly gone is to argue that, in advanced economies at any rate, innovation mechanism and discovery largely shape the experience and the rewards of participating in the economy.