Who Is Robert E. Lucas Jr.?
Robert Emerson Lucas Jr. is a New Classical economist at the University of Chicago, renowned for his prominent role in developing microeconomic foundations for macroeconomics based on rational expectations. He won the Nobel Prize in Economics in 1995 for his contributions to the theory of rational expectations.
- Robert E. Lucas Jr. is a New Classical economist and long-time professor at the University of Chicago.
- Lucas is best known for his development of rational expectations theory and the eponymous Lucas Critique of macroeconomic policy.
- Lucas received the Nobel Prize in 1995 for his contributions to economic theory.
Understanding Robert E. Lucas Jr.
Robert E. Lucas Jr. was born the eldest child of Robert Emerson Lucas Sr. and Jane Templeton Lucas in Yakima, Washington, on Sept. 15, 1937. Lucas received a Bachelor of Arts in History from the University of Chicago in 1959. He initially pursued graduate studies at the University of California, Berkeley, before returning to Chicago for financial reasons. In 1964, he earned his Ph.D. in economics.
Initially, he believed his academic life would center around history, and he only continued his economic studies after reaching the conclusion that economics is the true driving force of history. Significantly, Lucas claimed to have studied economics via a "Marxist" point of view, in the sense that Marx believed the vast, impersonal forces that drive history are largely a matter of economics.
Lucas became a professor at Carnegie Mellon University at the Graduate School of Industrial Administration, before returning to the University of Chicago in 1975. He is currently a professor emeritus at the University of Chicago.
In 1995, Lucas was awarded the Nobel Memorial Prize in Economics for developing the theory of rational expectations.
Lucas is most well known for his contributions to macroeconomics including the development of the New Classical school of macroeconomics and the Lucas Critique. Lucas has spent much of his academic career investigating the implications of the rational expectations theory in macroeconomics. He also made important contributions to theories of economic growth.
Lucas built his career applying the idea that people in the economy form rational expectations about future events and the impact of macroeconomic policies. In a paper in 1972, he incorporated the idea of rational expectations to extend the Friedman-Phelps theory of long-term vertical Phillips Curve. A vertical Phillips Curve implies that expansionary monetary policy will increase inflation, without boosting the economy.
Lucas argued that if (as is assumed in microeconomics) people in the economy are rational, then only unanticipated changes to the money supply will have an impact on output and employment; otherwise people will just rationally set their wage and price demands according to their expectations of future inflation as soon as a monetary policy is announced and the policy will only have an impact on prices and inflation rates. Thus not only (per Friedman and Phelps) is the Phillips Curve vertical in the long run, it is also vertical in the short run except when monetary policymakers can make unannounced, unpredictable, or truly surprising moves that market participants are unable to anticipate.
The Lucas Critique
He also developed the Lucas Critique of economic policymaking, which holds that relationships between economic variables observed in past data or estimated by macroeconometric models are not reliable for economic policymaking because people rationally adjust their expectations and behavior based on their understanding of the impact of economic policy. The expectations about economic conditions and policy that shaped consumer, business, and investor behavior during the periods from which past data are drawn often will not hold once conditions and policies change.
This means that economic policymakers cannot reliably hope to manage the economy by tinkering with key variables, such as money supply or interest rates, because the act of doing so also changes the relationship between these variables and the variables that represent the targeted outcomes, such as GDP or unemployment rates. Thus the Lucas Critique argues against activist macroeconomic policy aimed at managing the economy.
Economic Growth and Development Economics
Lucas also made contributions to endogenous growth theory and to unifying growth theory (which applied mostly to growth in developed economies) with development economics (applied to less developed economies). This includes the Lucas-Uzawa model, which explains long-run economic growth as dependent on human capital accumulation, and the Lucas Paradox, which asks why capital does not appear to flow to regions of the globe where capital is relatively scarce (and thus receives a higher rate of return) as neoclassical growth theory would predict.