Does Edmund Phelps really deserve the Nobel Prize in Economics?

Writing at ZNet, Indian economist Girish Mishra offers up some historical context for the purposefully created phenomenon of "involuntary employment", and in that perspective demonstrates what seems to be a somewhat controversial decision in giving a Nobel Peace Prize to Columbia University economics professor Edmund S. Phelps. He traces the role of unemployment as a tool to keep workers from taking "collective action" like unionizing and demanding a living wage, benefits, etc, through Keynes' post-Depression prescription that the federal government needed to proactively generate employment opportunities in order to increase the volume of effective demand to clear the market--advice that ultimately saved capitalism from itself.

While Keynes' philosophy helped pave the way for the New Deal and the creation of a welfare state in America for the first time, conservatives pushed back with theories of their own to support governmental interference in the marketplace of a more malevolent kind. Specifically, the British economist Alban Phillips posited that a negative relationship existed between unemployment and the level of inflation, which meant that when unemployment rose, the rate of increase of money wages fell, and vice versa. This counter-intuitive relationship gained currency among technocrats and was called the "Phillips curve" (see here for more background).

The upshot of this theory was that with an unemployment rate of 3%, (which was regarded by most Americans as the full employment level), inflation would be between 4-5% and therefore a policy of working toward very low unemployment rates was not desirable.

During the stagflation of the 1960s and 70s in the US, where unemployment and inflation began to rise simultaneously, the world of academia began to question the efficacy of the theory, and it was not until it was rescued by Phelps, who put forward research demonstrating that the Phillips curve was, in fact, still valid. There was a return to the seemingly-discredited economic theory, which Mishra provocatively describes as:

"If the labour market is tight because the rate of unemployment is low, companies may offer higher wages to attract workers, but these higher wages are bound to push up the prices by pushing up costs of production. Rising prices, in turn, pull down the real wages, which may, sooner or later, prompt workers to agitate for higher wages. Thus an unending race between higher wages and higher rates of inflation begins. The solution, according to Phelps, is establishing an equilibrium where workers’ expectations are fulfilled and prices stabilize. This equilibrium does not mean full employment. Phelps stresses that this equilibrium is achieved when unemployment rises to its natural rate, telling a certain number of workers that they are redundant or unwanted."

The validity and renewed acceptance of this theory, while clearly comforting to policymakers at the Fed and the investment banks whose interests they strive to protect and advance, is very much in question. See, for example, this editorial by economist Dean Baker as well as this critique by Ramaa Vasudevan over at Dollars & Sense. Whether Phelps deserves a Nobel Prize for his contributions to advancing these theories ought to be somewhat controversial, I think. Apparantly, Brad DeLong thinks the decision is a good one, and I tend to value his opinion rather highly when it comes to economics, but I still have some concerns.