The Influence of Robert E. Lucas Jr
Professor Robert E. Lucas Jr is widely acknowledged as the originator and
central figure in the development of the new classical approach to macroeconomics
and has been described by Michael Parkin (1992) as ‘the leading
macro mountaineer of our generation’. In recognition of Lucas’s seminal
research in macroeconomics, in October 1995 the Royal Swedish Academy
of Sciences announced its decision to award him the Nobel Memorial Prize in
Economics ‘for having developed and applied the hypothesis of rational
expectations, and thereby having transformed macroeconomic analysis and
deepened our understanding of economic policy’. The award of this prestigious
prize to Lucas came as no surprise to economists since, without doubt,
his important contributions have made him the most influential macroeconomist
during the last quarter of the twentieth century (see Fischer, 1996a; Hall,
1996; Svensson, 1996; Hoover, 1988, 1992, 1999; Snowdon and Vane, 1998).
While some commentators see Lucas’s contributions to business cycle analysis
as ‘part of the natural progress of economics’ (Chari, 1998), or as ‘part of
the steady accumulation of knowledge’ (Blanchard, 2000), others make frequent
reference to ‘revolution’ or counter-revolution when discussing the
influence of Lucas’s contributions to macroeconomics (Tobin, 1996; Snowdon
and Vane, 1999b; Woodford, 2000).
Although Lucas made explicit use of the rational expectations hypothesis
in analysing optimal investment policy as early as 1965, it was not until he
began to wrestle with aggregate supply issues, within a Walrasian general
equilibrium framework, that the real significance of this hypothesis for macroeconomics
became clear (Fischer, 1996a). While the Lucas and Rapping
(1969) paper is perhaps the first ‘new classical’ paper in spirit, because of its
emphasis on the equilibrium (voluntary) nature of unemployment and its
utilization of the intertemporal labour substitution hypothesis (see Hoover,
1988 and Chapter 6), it was the series of papers written by Lucas and
published in the period 1972–8 that established the analytical base of the
rational expectations equilibrium approach to research into aggregate ecoThe
nomic fluctuations (business cycles). Collectively these papers had an immense
influence on the direction of macroeconomic research during the last
quarter of the twentieth century. One objective measure or indication of the
impact/influence that certain papers have on the development of macroeconomics
is provided by citation counts as recorded by the Social Science
Citations Index. In Table 5.1 citation counts are provided for the three most
heavily cited papers written by Lucas (1972a, 1973, 1976) in the area of
mainstream macroeconomics, together with one example taken from the field
of economic growth (Lucas, 1988). In order to help place the influence of
these papers in context we also provide information on citation counts for
three other well-known and heavily cited papers, namely those by Friedman
(1968a) and Kydland and Prescott (1977, 1982).
The influence of Lucas has been tremendously
important for the direction of macroeconomics since 1970. However, other
influential American exponents of new classical macroeconomics during the
1970s included Thomas Sargent, Robert Barro, Edward Prescott and Neil
Wallace. In the UK the new classical approach, in particular the need to
incorporate the rational expectations hypothesis into macroeconomic analysis,
was mainly championed by Patrick Minford (see interviews with Professors
Barro and Minford in Snowdon et al., 1994).
Building on the insights developed by Milton Friedman (1968a) and Edmund
Phelps (1968) concerning the neglect of endogenous expectations in Keynesian
macro models, the work of Lucas (1972a, 1972b, 1973, 1975, 1976) was
crucial in introducing macroeconomists to Muth’s (1961) rational expecta222
Modern macroeconomics
tions hypothesis, together with its enormous implications for theoretical and
empirical work (Lucas, 1981a). In particular, with the introduction of rational
expectations the standard Keynesian models seemed unable to deliver their
traditional policy conclusions. It soon became apparent that what Alan Blinder
refers to as the ‘Lucasian revolution’ represented a much more powerful and
potentially damaging challenge to the Keynesian mainstream than the monetarist
critique, which was of longer standing (see Snowdon, 2001a). Lucas
recalls that he was ‘raised as a monetarist in the 1960s’ and that Friedman
‘has been an enormous influence’. Indeed, during the 1990s, Lucas still
thought of himself as a ‘monetarist’ (Lucas, 1994b; Snowdon and Vane,
1998). But while orthodox monetarism presented itself as an alternative to
the standard Keynesian model, it did not constitute a radical theoretical
challenge to it (see Laidler, 1986). Thus while the mark I 1970s version of
new classical macroeconomics initially evolved out of monetarist macroeconomics,
and incorporates certain elements of that approach (such as the
monetarist explanation of inflation), it is clear that new classical economics
should be regarded as a separate school of thought from orthodox monetarism.
While the new classical school during the 1970s was undoubtedly
‘monetarist’ in terms of its policy prescriptions, according to Hoover (1984)
the more radical tone to new classical conclusions stems from key theoretical
differences between Lucas and Friedman, and the roots of this theoretical
divide are methodological: while Friedman is a Marshallian, Lucas is a
Walrasian. Despite their methodological differences, De Vroey (2001) is
undoubtedly correct in arguing that ‘Friedman and Lucas have probably been
the most influential economists of the second half of the twentieth century:
between them they were able to throw the Keynesian paradigm off its pedestal’.
In his review of Tobin’s (1980a) book, Asset Accumulation and Economic
Activity: Reflections on Contemporary Macroeconomic Theory, Lucas (1981b)
declared that:
Keynesian orthodoxy or the neoclassical synthesis is in deep trouble, the deepest
kind of trouble in which an applied body of theory can find itself. It appears to be
giving seriously wrong answers to the most basic questions of macroeconomic
policy.
Why and how Lucas and other new classical economists came to this negative
view of Keynesian economics during the 1970s is the main theme of this
chapter.
In the remainder of this chapter we have four main objectives. First, to
discuss the central theoretical propositions which underlie new classical models
(section 5.3). Second, in the light of this discussion, to consider the new
classical theory of the business cycle (section 5.4). Third, to examine the
main policy implications that derive from the new classical approach to
macroeconomics (section 5.5). Finally (section 5.6) we assess the impact that
the new classical school has had on the development of macroeconomics.
Professor Robert E. Lucas Jr is widely acknowledged as the originator and
central figure in the development of the new classical approach to macroeconomics
and has been described by Michael Parkin (1992) as ‘the leading
macro mountaineer of our generation’. In recognition of Lucas’s seminal
research in macroeconomics, in October 1995 the Royal Swedish Academy
of Sciences announced its decision to award him the Nobel Memorial Prize in
Economics ‘for having developed and applied the hypothesis of rational
expectations, and thereby having transformed macroeconomic analysis and
deepened our understanding of economic policy’. The award of this prestigious
prize to Lucas came as no surprise to economists since, without doubt,
his important contributions have made him the most influential macroeconomist
during the last quarter of the twentieth century (see Fischer, 1996a; Hall,
1996; Svensson, 1996; Hoover, 1988, 1992, 1999; Snowdon and Vane, 1998).
While some commentators see Lucas’s contributions to business cycle analysis
as ‘part of the natural progress of economics’ (Chari, 1998), or as ‘part of
the steady accumulation of knowledge’ (Blanchard, 2000), others make frequent
reference to ‘revolution’ or counter-revolution when discussing the
influence of Lucas’s contributions to macroeconomics (Tobin, 1996; Snowdon
and Vane, 1999b; Woodford, 2000).
Although Lucas made explicit use of the rational expectations hypothesis
in analysing optimal investment policy as early as 1965, it was not until he
began to wrestle with aggregate supply issues, within a Walrasian general
equilibrium framework, that the real significance of this hypothesis for macroeconomics
became clear (Fischer, 1996a). While the Lucas and Rapping
(1969) paper is perhaps the first ‘new classical’ paper in spirit, because of its
emphasis on the equilibrium (voluntary) nature of unemployment and its
utilization of the intertemporal labour substitution hypothesis (see Hoover,
1988 and Chapter 6), it was the series of papers written by Lucas and
published in the period 1972–8 that established the analytical base of the
rational expectations equilibrium approach to research into aggregate ecoThe
nomic fluctuations (business cycles). Collectively these papers had an immense
influence on the direction of macroeconomic research during the last
quarter of the twentieth century. One objective measure or indication of the
impact/influence that certain papers have on the development of macroeconomics
is provided by citation counts as recorded by the Social Science
Citations Index. In Table 5.1 citation counts are provided for the three most
heavily cited papers written by Lucas (1972a, 1973, 1976) in the area of
mainstream macroeconomics, together with one example taken from the field
of economic growth (Lucas, 1988). In order to help place the influence of
these papers in context we also provide information on citation counts for
three other well-known and heavily cited papers, namely those by Friedman
(1968a) and Kydland and Prescott (1977, 1982).
The influence of Lucas has been tremendously
important for the direction of macroeconomics since 1970. However, other
influential American exponents of new classical macroeconomics during the
1970s included Thomas Sargent, Robert Barro, Edward Prescott and Neil
Wallace. In the UK the new classical approach, in particular the need to
incorporate the rational expectations hypothesis into macroeconomic analysis,
was mainly championed by Patrick Minford (see interviews with Professors
Barro and Minford in Snowdon et al., 1994).
Building on the insights developed by Milton Friedman (1968a) and Edmund
Phelps (1968) concerning the neglect of endogenous expectations in Keynesian
macro models, the work of Lucas (1972a, 1972b, 1973, 1975, 1976) was
crucial in introducing macroeconomists to Muth’s (1961) rational expecta222
Modern macroeconomics
tions hypothesis, together with its enormous implications for theoretical and
empirical work (Lucas, 1981a). In particular, with the introduction of rational
expectations the standard Keynesian models seemed unable to deliver their
traditional policy conclusions. It soon became apparent that what Alan Blinder
refers to as the ‘Lucasian revolution’ represented a much more powerful and
potentially damaging challenge to the Keynesian mainstream than the monetarist
critique, which was of longer standing (see Snowdon, 2001a). Lucas
recalls that he was ‘raised as a monetarist in the 1960s’ and that Friedman
‘has been an enormous influence’. Indeed, during the 1990s, Lucas still
thought of himself as a ‘monetarist’ (Lucas, 1994b; Snowdon and Vane,
1998). But while orthodox monetarism presented itself as an alternative to
the standard Keynesian model, it did not constitute a radical theoretical
challenge to it (see Laidler, 1986). Thus while the mark I 1970s version of
new classical macroeconomics initially evolved out of monetarist macroeconomics,
and incorporates certain elements of that approach (such as the
monetarist explanation of inflation), it is clear that new classical economics
should be regarded as a separate school of thought from orthodox monetarism.
While the new classical school during the 1970s was undoubtedly
‘monetarist’ in terms of its policy prescriptions, according to Hoover (1984)
the more radical tone to new classical conclusions stems from key theoretical
differences between Lucas and Friedman, and the roots of this theoretical
divide are methodological: while Friedman is a Marshallian, Lucas is a
Walrasian. Despite their methodological differences, De Vroey (2001) is
undoubtedly correct in arguing that ‘Friedman and Lucas have probably been
the most influential economists of the second half of the twentieth century:
between them they were able to throw the Keynesian paradigm off its pedestal’.
In his review of Tobin’s (1980a) book, Asset Accumulation and Economic
Activity: Reflections on Contemporary Macroeconomic Theory, Lucas (1981b)
declared that:
Keynesian orthodoxy or the neoclassical synthesis is in deep trouble, the deepest
kind of trouble in which an applied body of theory can find itself. It appears to be
giving seriously wrong answers to the most basic questions of macroeconomic
policy.
Why and how Lucas and other new classical economists came to this negative
view of Keynesian economics during the 1970s is the main theme of this
chapter.
In the remainder of this chapter we have four main objectives. First, to
discuss the central theoretical propositions which underlie new classical models
(section 5.3). Second, in the light of this discussion, to consider the new
classical theory of the business cycle (section 5.4). Third, to examine the
main policy implications that derive from the new classical approach to
macroeconomics (section 5.5). Finally (section 5.6) we assess the impact that
the new classical school has had on the development of macroeconomics.
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