The great Warren Brookes (1928-1991) joked in The Economy In Mind about the return of an economist from overseas, and a quip from a U.S. Passport official about perhaps not letting him back into the United States. Something about the damage done by economists.
Edmund Phelps, who died two weeks ago, would have likely passed muster with Brookes. Among other things, Phelps had long ago made a case for the correlation between individuals working more the less they were taxed.
Just the same, Phelps might not have gotten past the passport official. The PhD disease sometimes clouded his wise mind. For background, think a rarely (if ever) quoted line from Henry Hazlitt’s (a non-economist) Economics In One Lesson: “What is harmful or disastrous to an individual must be equally harmful or disastrous to a collection of individuals that make up a nation.” Hazlitt was making the basic point that an economy isn’t a machine that requires tending, it’s just individuals.
Which is where Phelps arguably went off track. Wed to the macro side of economics, Phelps made assertions that didn't make sense if put under a microeconomic (the only kind of economics) light. According to his obituary in the New York Times, and in response to incentives meant to encourage savings, Phelps observed that “You don’t want to save too much, because you’ll overshoot.” Exactly because Phelps was so wise, his analysis was disappointing.
The guess here is that it was rooted in his focus on the collective (macro) over the individual. That’s because no individual could ever save too much. As the genius of compounding routinely vivifies, there’s no negative born of savings.
No doubt Keynesian-infused economic thinkers would say otherwise, and perhaps Phelps had a latent Keynesian thought process. Those who lean that way claim consumption powers economic growth, but the view was and is false. Economic growth is just production, and we produce more the more that our efforts are matched with capital.
Beyond all that, and as evidenced by the genius of compounding, there’s no loss of consumption from saving in the first place. Saving is merely a return-focused shift of wealth to others, including those who want to match the wealth with others via investment.
The Times added that Phelps “agreed that stoking the economy to keep inflation up might keep unemployment down in the short term,” but that the “stimulus would have to keep growing, and inflation would keep rising too.” No, that’s false. On numerous levels. Governments quite simply have no resources. To pretend that they can extract them from the private sector, and consume them in stimulative fashion presumes that politicized government consumption grows economies in ways that free people, free to keep what they’ve produced, do not.
About unemployment, Phelps believed it was necessary for a healthy economy, that too little unemployment “would drive up wages and prices.” Nonsense. Wages are an effect of investment in workers, and the productivity they bring to work each day. That’s why so much investment flows to the richest, highest wage U.S. locales.
About “inflation,” Phelps told the Times in 2023 that “If everybody’s expecting inflation elsewhere, they’re going to be raising their prices too.” He surely knew better. "They" won’t raise prices because as we see through stock prices routinely, the most valuable corporations get that way by making up in sales volume what they “lose” in lower prices.
Some who read this will blame the Times for taking Phelps’s thinking out of context, and hopefully that's true. But the more realistic assumption is that the Times revealed the problem with economics. It’s macroeconomics.
