Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts

of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org

where you can subscribe, find other episodes, comment on this podcast, and find links to

another information related to today's conversation. Our email address is mailadicontalk.org. We'd

love to hear from you. Today is February 12, 2010, and my guest is Edmund Phelps, the

McVicker Professor of Political Economy at Columbia University, Director of Columbia's

Center on Capitalism and Society and the winner of the 2006 Nobel Prize in Economics. Professor

Phelps, welcome to Econ Talk. Thank you. I want to start with a quote from your Nobel

Prize lecture. It's a little long, but it's I think very important. And it's the quote

begins by talking about Paul Samuelson's work and Samuelson recently passed away. And

for listeners who don't know, his Samuelson's 1948 work, the Foundations of Economic Analysis,

really was the beginning of certainly a landmark in the formalization of economic theory

into mathematical form, not that they had been mathematics before, but Samuelson really

took it to a much higher level. And here's what the quote is from Professor Phelps's Nobel

Prize lecture. Samuelson's project to correct, clarify, and broaden the theory, brought

into focus its strengths, but also its limitations. It abstracted from the distinctive character

of the modern economy, the endemic uncertainty and baguity, diversity of beliefs, specialization

of knowledge and problem solving. As a result, it could not capture or endogenize the observable

phenomena that are endemic to the modern economy, innovation, waves of rapid growth, big

swings in business activity, disequilibria, intense employee engagement, and workers intellectual

development. Best and brightest of the neoclassical saw these defects, but lacked a micro theory

to address them. So end of quote. So to get us started, I'd like you to talk about how

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