According to the magazine, "Phelps won his laurels in part for ki cking the feet from under his intellectual forerunners" by prese nting a neo-classical explanation for the breakdown of the so-called &quo t;Phillips curve" which presented a statistical trade-off between in flation and unemployment ("unemployment was low in Britain when w age inflation was high, and high when inflation was low"). The problem was that economists "were quick - too quick - to conclude that policymakers therefore faced a grand, macroeconomic trade-off." ; The magazine presents it as follows:
"In such a tight labour market, companies appease workers by o ffering higher wages. They then pass on the cost in the form of dearer pr ices, cheating workers of a higher real wage. Thus policymakers can engin eer lower unemployment only through deception."
Phelps innovation was to argue that "[e]ventually workers will cotton on, demanding still higher wages to offset the rising cost of liv ing. They can be duped for as long as inflation stays one step ahead of t heir rising expectations of what it will be." This meant that th e "stable trade-off depicted by the Phillips curve is thus a dang erous mirage" which broken in the 1970s with the rise of stagfla tion (high unemployment and high inflation). Phelps, reports the Economis t, argued that there was a "natural" rate of unemployment, wher e "workers' expectations are fulfilled, prices turn out as antici pated, and they no longer sell their labour under false pretences."< /I> This "equilibrium does not, sadly, imply full employment&quo t; and so capitalism required "leaving some workers moulderin g on the shelf. Given economists' almost theological commitment to the no tion that markets clear, the presence of unemployment in the world requir es a theodicy to explain it." The religious metaphor does seem a ppropriate as most economists (and the Economist) do treat the market lik e a god (a theodicy is a specific branch of theology and philosophy that attempts to reconcile the existence of evil in the world with the assumpt ion of a benevolent God).
And, as with all gods, sacrifices are required and Phelps' theory is t he means by which this is achieved. As the Economist notes: "in m uch of his work he contends that unemployment is necessary to cow workers , ensuring their loyalty to the company and their diligence on the job, a t a wage the company can afford to pay" (i.e., one which would e nsure a profit). Unsurprisingly, attempts to lower the "natural rate " have all involved using the state to break the economic power of w orking class people (attacking unions, increasing interest rates to incre ase unemployment in order to temporarily "cow" workers a nd so on). All so that profits can be keep high in the face of the rising wages caused by the natural actions of the market!
Yet Phelps' conclusions are hardly new. Anarchists and other socialist s have been arguing that capitalism has no tendency to full employment si nce the 1840s either in theory or in practice. They have also noted how p eriods of full employment bolstered workers' power and harmed profits. It is the fundamental disciplinary mechanism of the system ("a whip in [the bosses'] hands, constantly held over you, so you will slave hard for him and 'behave' yourself," to use Berkman's memorable phra se). It is, in other words, "inherent in the wage system" and "the fundamental condition of successful capitalist product ion." While it is "dangerous and degrading" to the worker, it is "very advantageous to the boss" and so capitalism "can't exist without it." (Alexander Berkman , What is Anarchism?, p. 26)
These kinds of arguments used to be dismissed as nonsense by neo-class ical economists (the main branch of the religion). So it is ironic Phelps has got a (non-)Nobel prize for restating, in neo-classical jargon, the model of the labour market expounded in, say, Chapter 25 of the first vol ume of Marx's Capital:
"If [capital's] accumulation, on the one hand, increases the d emand for labour, it increases on the other the supply of labourers by th e 'setting free' of them, whilst at the same time the pressure of the une mployed compels those that are employed to furnish more labour, and there fore makes the supply of labour, to a certain extent, independent of the supply of labourers. The action of the law of supply and demand of labour on this basis completes the despotism of capital. As soon, therefore, as the labourers learn the secret, how it comes to pass that in the same me asure as they work more, as they produce more wealth for others . . . as soon as, by Trades' Unions, etc., they try to organise a regular co-opera tion between employed and unemployed in order to destroy or to weaken the ruinous effects of this natural law of capitalistic production on their class, so soon capital and its sycophant, Political Economy, cry out at t he infringement of the 'eternal' and so to say 'sacred' law of supply and demand. Every combination of employed and unemployed disturbs the 'harmo nious' action of this law. But, on the other hand, as soon as . . . adver se circumstances prevent the creation of an industrial reserve army and, with it, the absolute dependence of the working-class upon the capitalist class, capital . . . rebels against the 'sacred' law of supply and deman d, and tries to check its inconvenient action by forcible means and State interference."
That the Economist and Phelps are simply echoing, and confirming, Marx is obvious. Phelps' theory has informed "State interference" i n the economy for the last 30 odd years. The use of Phelps' theory by cap ital in the class war is equally obvious -- as was so blatantly stated by the Economist.