Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interest, and Assets.

Structural Slumps is a continuation of Edmund Phelps's extensive work on the natural unemployment rate. In this volume Professor Phelps seeks to explain the structural factors that would cause changes in the natural rate. In particular, he is most interested in how a change in the structure of the economy (reflected in interest rates, government deficits, or transfer payments) alters the dynamic paths of unemployment and other macroeconomic variables. The practical objective is to understand persistent high rates of unemployment existing during the 1980s. This is a commendable effort.

He pursues this objective by developing three separate models, each with its own asset at the center of analysis (trained employees, customers, and capital goods) that model activity in the labor, product, and capital markets, respectively. He develops and analyzes each model, then seeks to combine the three into a more general equilibrium framework. The primary shortcoming of his theoretical development is an incomplete synthesis of the three models into comprehensive structure.

Structural Slumps is not a book for the casual reader. Readers should be prepared to spend considerable time and effort working through Phelps's presentation. The writing style is somewhat heavy-handed, often with two-or three parenthetical thoughts in a sentence, and primary thoughts frequently spread across several sentences. Phelps also assumes that readers are intimately familiar with related models, analyses, and theories that are central to his line of thought (especially in the first ten chapters). Many salient points are lost, however, on readers without this familiarity. Economists on the cutting edge of macroeconomic theory will find this treatise intruguing and insightful. Others will need to pause every few paragraphs for background research.

Structural Slumps contains 20 chapters divided into six parts. After a brief introduction, Phelps presents a six-chapter overview of existing general equilibrium theory, focusing on the three markets that form the core of his theory - labor, product, and capital in Part I. This part sets the stage for the presentation of his theory in Parts II and III.

The first three chapters in Part II lay out each of the three models - Turnover Training, Customer Market, and Two-Sector Fixed Investment - that deal with the three assets under scrutiny - trained employees, customers, and capital, respectively. These three chapters will provide the roughest terrain for most readers. Chapter 10, the last in Part II, is perhaps the most important up to this point as it synthesizes the three analyses into a comprehensive view of a close economy. Phelps points out in several places how his analysis is both contradictory to and consistent with standard Keynesian analysis. A key implication and theme running throughout this work is that government spending on consumption goods is, contrary to Keynesian analysis, contractionary, while government spending on capital goods is expansionary.

In Part III, Phelps modifies his three models and general equilibrium synthesis to large and small open economy frameworks. Here he is moving in the direction of explaining extended periods of high unemployment rates in the United States and Europe in recent decades. The lack of integration of the three models, as already noted, best reveals itself in the global synthesis of Chapter 14. Implications derived from one model occasionally conflict with those of another. Whether Phelps has identified counteracting forces in the complexity of the economy or his theory is subject to inconsistencies is not readily clear.

Part IV presents two chapters that explore the micro foundations of his theory. Chapter 15 examines micro aspects of the labor market, especially saving and shirking, that are fundamental to the structuralist view. Chapter 16 explores the neoclassical approach to general equilibrium underlying real business cycle theory. It analyzes the dynamic paths of several shocks, noting some implications that are contrary to the conventional wisdom of real business cycle. Once again, a key implication is the differential effect of government purchases of consumption versus capital goods.

From an operational, nontheoretical standpoint, Part V is the most enlightening section of Structural Slumps. In these two chapters, Phelps subjects his theory to empirical analysis with the goal of explaining the global slump of the 1980s. Chapter 17 seeks to determine theoretical conformity of the structural theory with an econometric model supported by available date. Chapter 18 then evaluates the explanatory ability of structural theory with respect to broad movements in unemployment over several decades. Both chapters combined tell a revealing tale of structural forces operating on macroeconomic activity.

Part VI contains two chapters, one placing his structural theory in the context of classicism, especially so-called supply-side economics and a second presenting alternative policies suggested by this structuralist view of the economy. The chapter on classicism would have served a more useful purpose had it been placed near the beginning of the book, an order that would have provided a better setting for all subsequent analyses. Chapter 20 provides an evaluation of traditional Keynesian stimulus policies and those implied by the structuralist theory. Here Phelps comes to the key policy recommendations, including a balanced-budget cut in transfer payments, a cut in public expenditures, a change in the mix of labor-intensive versus capital-intensive public expenditures. These are, however, secondary to the recommendation of some form of multilateral international system of employment subsidies.

Structural Slumps should enhance our understanding of the modern macroeconomy during a period in which macroeconomic theory is in flux. The extent to which his framework will enter into mainstream thought remains to be seen. Phelps has clearly captured several logical theoretical aspects of our system. His theory, though, needs to be subjected to the scrutiny of further testing to see if stands the test of time.

Orley M. Amos, Jr. Oklahoma State University