Wednesday, March 9, 2011

Robert Lucas, Jr.

From the Wikipedia:

One of the most influential economists since the 1970s, he challenged the foundations of macroeconomic theory (previously dominated by the Keynesian economics approach), arguing that a macroeconomic model should be built as an aggregated version of microeconomic models (while noting that aggregation in the theoretical sense may not be possible within a given model).

Okay. This is the guy who opened the door to the death of Keynesian economics.

He developed the "Lucas critique" of economic policymaking, which holds that relationships that appear to hold in the economy, such as an apparent relationship between inflation and unemployment, could change in response to changes in economic policy. This led to the development of neoclassical and New Keynesian economics and the drive towards microeconomic foundations for macroeconomic theory.

The changes "in response to changes in economic policy" are not the changes that concern me. The economy is expected to change in response to policy. That's what policy is for.

I am more concerned that "relationships that appear to hold in the economy" are likely to change in response to changes in economic conditions. For example, in a developed economy with only a small accumulation of debt, there is a positive relation between economic growth and the use of credit. But when that same economy has accumulated a lot of debt, the relation between credit-use and growth is unclear and unreliable.

He believed that economics was the true driver of history

Well, Lucas was certainly right about that.

Why are we talking about him in the past tense?


Bigvic said...

We're talking about him in the past tense because he repudiated his own theories, and no one even teaches him anymore in the Econ departments, except as a little side note in the history of economic thought. His theories are laughable today, and no respectable professor even mentions them seriously in an actual theory class

The Arthurian said...

Oh -- I didn't get that from the Wikipedia article. I thought I was being funny.

So what you are saying is: The guy who "challenged the foundations of macroeconomic theory" and provided the theoretical foundation for Reaganomics, has repudiated that foundation?

Bigvic said...

I can't quite tell if that was sarcasm or not. But he repudiated the whole notion of rational expectations as it failed many times empirically and he was force to concede that his theory might not have been correct after all. This happened some time in the mid to late 90s. I don't disagree that economics is the driver of history, I would just amend it to political economy, I think the classicals got that right.

The Arthurian said...

I'm not finding much support on the internet for your claim about Lucas. A couple post-titles, that's all. One from Brad DeLong:

and one from Richard Posner:

Both posts read like wishful thinking. I don't see anywhere, Robert Lucas saying "I was wrong."

Where does your Lucas claim come from?

Bigvic said...

he never used the words "I was wrong", he just admitted that there might be serious flaws with his own theory since empirically it failed every time (what are the chances that people don't have a super computer in their head calculating inflation at every single hour and adjusting their exceptions to that). To be fair, I don't know where my professors got that either, although its clear, a lot of them had fun ridiculing the suppositions of the theory.