Robert
Lucas’ contributions to economics have consisted of theoretical and econometric
work on business-cycle theory and capital theory that led to the creation of a
“new” macroeconomics based on the concept of “rational expectations”. Lucas
argued that human beings should be conceived as forming their expectations on
the basis of exactly the same information that is available to policy-makers
and should not be assumed simply to adapt their behavior to the differences
between expected and realized events, the standard approach of macroeconomics
in the post World War II period.
The
Nobel Committee recognized Professor Lucas “for having developed and applied
the hypothesis of rational expectations, and thereby having transformed
macroeconomic analysis and deepened our understanding of economic policy.”
Quotes from Robert Lucas’ April 2001 lecture at
I loved the Foundations. Like so many
others in my cohort, I internalized its view that if I couldn’t formulate a problem
in economic theory mathematically, I didn’t know what I was doing. I came to the position that mathematical
analysis is not one of many ways of doing economic theory: It is the only way. Economic theory is mathematical analysis.
Everything else is just pictures and talk.
In 1963, I had thought of a competitive
industry in terms of firms solving short- and long-run, deterministic profit
maximization problems, under the (false) belief that current prices would
maintain their current values forever, and with the passage from one to the
other and all the effects of unpredictable shocks tacked on as
afterthoughts. Five years later, I
thought of the same economics in terms of firms maximizing expected discounted
present value, with rational expectations about the probability distributions
of future prices, and with stochastic shocks and adjustment costs both fully
integrated into the theory. From an
objective point of view, this transformation can be viewed as a product of
decades of research by many economists.
From my subjective viewpoint, it was the most rapid, radical change of
view I have ever experienced as an economist.
Further work led to “Expectations and
the Neutrality of Money,” submitted to the American Economic Review in 1970 and finally published in the Journal of Economic Theory in
1972. The paper contained a careful and
explicit construction of a theoretical example of an economy in which the
motives, opportunities, and information of every economic actor was
unambiguously spelled out. Expectations
were rational. In this setting, as in
Friedman’s AEA address, there was no long run trade-off between employment and
inflation. Yet the model also implied
the kind of correlations between employment and inflation that were then widely
interpreted as hard evidence that such trade-offs did exist. I felt I understood for the first time both
why Friedman and Phelps were right in arguing there was no long run trade-off
between unemployment and inflation and why econometric tests continued to
reject this “natural rate” view. Working
out this example took me to the limit of my technical skills and beyond: It was
not easy reading, nor had it been easy writing… It is easy for me to see the influences of
Phelps, Rapping,
On Monday I felt foolish as soon as I
saw Ed [
“Bob, This is
the way labor markets work:
v(s,y,λ) = max {λ,R(s,y) +
min[λ,β∫v(s′,y,λ)f(s′,s)ds′]}. Ed”
The normal response to such a note
would, I suppose, have been to go upstairs to Ed’s office and ask for some kind
of explanation. But theoretical
economists are not normal, and we do not ask for words that “explain” what equations
mean. We ask for equations that explain
what words mean. Ed had provided an
equation that claimed to explain how labor markets work. It was my job to understand it and to decide
whether I agreed with this claim… If I
had to pick a single day to represent what I like about a life of research, it
would be this one. Ed’s note captures
exactly why I think we value mathematical modeling: It is a method to help us
get to new levels of understanding of the ways things work. No one could have written Ed’s equation down
at the beginning of an inquiry into the nature of unemployment: It is too far
from earlier ways of thinking to be grasped in one step. The new understanding that this equation
represents could only be gained through a trial-and-error process, involving
formulating and analyzing explicit models.
It is this struggle to capture behavior in tractable models that leads
us deeper into the economics of market interactions, and forms the progressive
element in economic thought.
Additional resources on Robert Lucas are available at the Nobel web
site.