Abstract
Our aim in this chapter is to give an overview of Robert Lucas’s theoretical contributions. After an introduction, Section 2 describes how he initiated what at the time was called the “rational expectations revolution” and is now called “Dynamic General Equilibrium” (DGE) macroeconomics (after having also been labelled “New Classical macroeconomics”, and “Dynamic Stochastic General Equilibrium” (DSGE) macroeconomics). In the third and fourth sections, we describe Lucas’s contributions to monetary and growth theory. Section 5 ponders his relationship with “Chicago economics”.
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Notes
- 1.
‘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 the many ways of doing economic theory: it is the only way. Economic theory is mathematical analysis. Everything else is just pictures and talk’ (Lucas 2001: 9).
- 2.
Such a standpoint could not but outrage Keynesian economists since to them the very purpose of macroeconomics was to justify the possibility of involuntary unemployment.
- 3.
- 4.
As Lucas stated in a 2007 interview: ‘Prescott and I argue that the general equilibrium theory that Arrow and Debreu and other mathematical economists developed in the 1940s and 1950s is a hugely flexible piece of machinery and it is a lot more useful than Arrow and Debreu imagined it was. You can twist that model around and you can deal with uncertainty, you can deal with dynamics, you can deal with a lot of stuff. It’s a great piece of equipment for thinking about applied economics, I think in terms of macro, Prescott and I were the first people to catch on to what a powerful piece of equipment it was’ (Lucas in Parker 2007: 97).
- 5.
Their collaboration started when Lucas was Assistant Professor and Prescott a doctorate student at Carnegie-Mellon. They shared the same purpose of anchoring macroeconomics in neo-Walrasian growth theory. Lucas and Prescott co-authored the first macroeconomics paper embedding rational expectations (Lucas and Prescott 1971) as well as an article on search using islands trade technology (Lucas and Prescott 1974).
- 6.
Twenty years or so after Lucas engaged in this project, the divergence still existed, as the following extract of a letter Lucas wrote to Prescott illustrates: ‘Enclosed is a draft of an anniversary review of Friedman and Schwartz. Tom Cooley commissioned three of these for an anniversary issue. As you can see, I’m still struggling to understand the relation between their work and yours – I may be the only economist in the world who thinks they are both basically right’ (Lucas to Prescott, 15 October, 1996, RELP, David M. Rubenstein Rare Book & Manuscript Library, Duke University: Box 8).
- 7.
It was a somewhat odd choice because Clower was hardly on Lucas’s methodological side whilst people closer to him, like Neil Wallace, were blazing a different trail.
- 8.
Each household is endowed with one unit of labour in each period, no disutility being attached to labour. It produces y units of a non-storable consumption. To avoid autarky, Lucas assumes that the single good comes in n different colours. Hence, consumption is a vector (c1, t, …, cn, t) with ci = ∑ ci, t.
- 9.
A possibly subsidiary reason was his lack of enthusiasm for RBC modelling.
- 10.
- 11.
A Chicago connection was clearly present given the work on the subject by Becker and Schultz.
- 12.
In the same paper, Lucas engages in a fascinating exercise in history of economic analysis by reconstructing Ricardo’s theory in neoclassical terms and discussing the role of social classes in classical theory.
- 13.
A very large literature exists on the Chicago School of Economics. Limiting ourselves to monographs, a non-exhaustive list includes Van Overtveldt (2007), Freedman (2008), Mirowski and Plehwe (2009), Emmett (2010), Van Horn et al. (2011), Hammond et al. (2013), Colander and Freedman (2019), and Jaffe et al. (2019).
- 14.
For the sake of brevity, henceforth we take the “Department” as an umbrella term for all the Chicago economists.
- 15.
When this distinction is made, the excellence of the Chicago economics community, as measured, for example, by the number of Nobel Prize recipients, cannot be confounded with the prestige of the Chicago School more broadly understood. Only three of the thirteen recipients of the Nobel in economics awarded to University of Chicago faculty can be regarded as full members of the Chicago School, namely, Friedman, Stigler, and Becker.
- 16.
An example helps to explains this point. Van Overtveldt would perhaps like to count Tom Sargent as a member of the Chicago School, possibly because of his affinities with Lucas, but feels that he ultimately cannot because Sargent has not spent enough time at Chicago (see Van Overtveldt 2007: 170).
- 17.
- 18.
- 19.
For a more detailed analysis of Friedman’s standpoint, see De Vroey (2009b).
- 20.
For this node, the relevant reference is to neo-Walrasian theory rather than Walrasian theory.
- 21.
‘Bob [Lucas] was in the Chicago tradition and was very concerned about empirical testing – whatever the hell that means – something that I have little sympathy for and very little interest in, to be perfectly honest. So, there was quite a difference in viewpoints about why you did theory and what the relevance of theory is’ (Cass in Spear and Wright 1998: 546).
References
Main works by Robert E. Lucas, Jr.
Golosov, M. and R.E. Lucas, Jr. (2007). ‘Menu Costs and Phillips Curves’. Journal of Political Economy, 115(2): 171–199.
Lucas, R.E., Jr. (1972). ‘Expectations and the Neutrality of Money’. Journal of Economic Theory, 4(2): 103–124.
Lucas, R.E., Jr. (1975). ‘An Equilibrium Model of the Business Cycle’. Journal of Political Economy, 83(6): 1,113–1,144.
Lucas, R.E., Jr. (1976). ‘Econometric Policy Evaluation: A Critique’. In K. Brunner and A.H. Meltzer (eds) The Phillips Curve and Labor Markets. Carnegie-Rochester Conference Series on Public Policy. Amsterdam: North-Holland: 19–46.
Lucas, R.E., Jr. (1977). ‘Understanding Business Cycles’. In K. Brunner and A.H. Meltzer (eds) Stabilization of the Domestic and International Economy. Carnegie-Rochester Conference Series on Public Policy. Amsterdam: North-Holland: 7–29.
Lucas R.E., Jr. (1980a). ‘Methods and Problems in Business Cycle Theory’. Journal of Money, Credit and Banking, 12(4): 696–715.
Lucas, R.E., Jr. (1980b). ‘Two Illustrations of the Quantity Theory of Money’. American Economic Review, 70(5): 1,005–1,014.
Lucas, R.E., Jr. (1980c). ‘Equilibrium in a Pure Currency Economy’. Economic Inquiry, 18(2): 203–220.
Lucas, R.E., Jr. (1981). Studies in Business-Cycle Theory. Oxford: Basil Blackwell.
Lucas, R.E., Jr. (1982). ‘Interest Rates and Currency Prices in a Two-Country World’. Journal of Monetary Economics, 10(3): 335–359.
Lucas, R.E., Jr. (1987). Models of Business Cycles. Oxford: Basil Blackwell.
Lucas, R.E., Jr. (1988). ‘On the Mechanics of Economic Development’. Journal of Monetary Economics, 22(1): 3–42.
Lucas, R.E., Jr. (1989) [2013]. ‘The Effects of Monetary Shocks When Prices Are Set in Advance’. Unpublished manuscript, University of Chicago. Reprinted as Chapter 12 in M. Gillman (ed.) Robert E. Lucas, Jr., Collected Papers on Monetary Theory. Cambridge, MA: Harvard University Press: 272–299.
Lucas, R.E., Jr. (1990). ‘Why Doesn’t Capital Flow From Rich to Poor Countries?’. American Economic Review, Papers and Proceedings, 80(2): 92–96.
Lucas, R.E., Jr. (1993). ‘Making a Miracle’. Econometrica, 61(2): 251–272.
Lucas, R.E., Jr. (1995). ‘Robert E. Lucas, Jr.: Biographical’. The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1995. Available at: https://www.nobelprize.org/prizes/economic-sciences/1995/lucas/biographical/.
Lucas, R.E., Jr. (1996). ‘Nobel Lecture: Monetary Neutrality’. Journal of Political Economy, 104(4): 661–682.
Lucas, R.E., Jr. (2001). ‘Professional Memoir’. Mimeo.
Lucas, R.E., Jr. (2002). Lectures on Economic Growth. Cambridge, MA: Harvard University Press.
Lucas R.E., Jr. (2004). ‘My Keynesian Education’. In M. De Vroey and K. Hoover (eds) The IS-LM Model: Its Rise, Fall, and Strange Persistence. Durham, NC: Duke University Press: 12–24.
Lucas, R.E., Jr. (2006). ‘Panel Discussion – Central Banking: Is Science Replacing Art?’. In Monetary Policy: A Journey from Theory to Practice. Frankfurt: European Central Bank: 168–171.
Lucas, R.E., Jr. (2007). ‘Remarks on the Influence of Edward Prescott’. Economic Theory, 32(1): 7–11.
Lucas, R.E., Jr. (2013). ‘Introduction’. In M. Gillman (ed.) (2013) Robert E. Lucas, Jr., Collected Papers on Monetary Theory. Cambridge, MA: Harvard University Press: xvii–xxvii.
Lucas, R.E., Jr. (2016). ‘Milton Friedman as Teacher and Scholar’. Chapter 1 in R.A. Cord and J.D. Hammond (eds) Milton Friedman: Contributions to Economics and Public Policy. Oxford: Oxford University Press: 7–17.
Lucas, R.E., Jr. and E.C. Prescott (1971). ‘Investment Under Uncertainty’. Econometrica, 39(5): 659–681.
Lucas, R.E., Jr. and E.C. Prescott (1974). ‘Equilibrium Search and Unemployment’. Journal of Economic Theory, 7(2): 188–209.
Lucas R.E., Jr. and L.A. Rapping (1969). ‘Real Wages, Employment, and Inflation’. Journal of Political Economy, 77(5): 721–754.
Lucas, R.E., Jr. and N.L. Stokey (1983). ‘Optimal Fiscal and Monetary Policy in an Economy Without Capital’. Journal of Monetary Economics, 12(1): 55–93.
Lucas, R.E., Jr. and M. Woodford (1993). ‘Real Effects of Monetary Shocks in An Economy with Sequential Purchases’. NBER Working Paper 4,250. Cambridge, MA: National Bureau of Economic Research.
Other Works Referred To
Becker G.S., K.M. Murphy and R. Tamura (1990). ‘Human Capital, Fertility, and Economic Growth’. Chapter XII in G. Becker (ed.) Human Capital: A Theoretical and Empirical Analysis: With Special Reference to Education. Chicago: Chicago University Press: 323–350.
Colander, D. and C. Freedman (2019). Where Economics Went Wrong: Chicago’s Abandonment of Classical Liberalism. Princeton: Princeton University Press.
De Vroey, M. (2009a). ‘A Marshall-Walras Divide? A Critical Review of the Prevailing Viewpoints’. History of Political Economy, 41(4): 709–736.
De Vroey, M. (2009b). ‘On the Right Side for the Wrong Reason: Friedman on The Marshall-Walras Divide’. Chapter 13 in U. Maki (ed.) The Methodology of Positive Economics: Reflections on the Milton Friedman Legacy. Cambridge: Cambridge University Press: 321–346.
De Vroey, M. (2011). ‘Lucas on the Relationship Between Theory and Ideology’. Economics: The Open-Access, Open Assessment E-Journal, 5(2011-4), 23 February.
De Vroey, M. (2012). ‘Marshall and Walras: Incompatible Bedfellows?’. European Journal of the History of Economic Thought, 19(5): 765–783.
De Vroey, M. (2016). A History of Macroeconomics: From Keynes to Lucas and Beyond. Cambridge: Cambridge University Press.
De Vroey, M. (2018). ‘The History of Recent Macroeconomics Through the Lens of the Marshall-Walras Divide’. LIDAM Discussion Paper 2018-18, Catholic University of Louvain. Available at: https://sites.uclouvain.be/econ/DP/IRES/2018018.pdf.
Emmett, R.B. (ed.) (2010). The Elgar Companion to the Chicago School of Economics. Cheltenham: Edward Elgar.
Fischer, S. (1996). ‘Robert Lucas’s Nobel Memorial Prize’. Scandinavian Journal of Economics, 98(1): 11–31.
Freedman, C. (2008). Chicago Fundamentalism: Ideology and Methodology in Economics. Singapore: World Scientific Publication Co.
Friedman, M. (1968). ‘The Role of Monetary Policy’. American Economic Review, 58(1): 1–17.
Friedman, M. (1974). ‘Schools at Chicago’. University of Chicago Magazine, 67(1): 11–16.
Gillman, M. (ed.) (2013). Robert E. Lucas, Jr., Collected Papers on Monetary Theory. Cambridge, MA: Harvard University Press.
Hammond, J.D., S.G. Medema and J.D. Singleton (eds) (2013). Chicago Price Theory. Three volumes. Cheltenham: Edward Elgar.
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Mirowski, P. and D. Plehwe (2009). The Road from Mount Pelerin: The Making of the Neoliberal Thought Collective. Cambridge, MA: Harvard University Press.
Parker, R.E. (2007). ‘Robert Lucas [Interview]’. In R.E. Parker (ed.) The Economics of the Great Depression: A Twenty-First Century Look Back at the Economics of the Interwar Period. Cheltenham: Edward Elgar: 88–101.
Phelps, E.S. (1967). ‘Phillips Curves, Expectations of Inflation and Optimal Unemployment Over Time’. Economica, New Series, 34(135): 254–281.
Phelps, E.S. (1968). ‘Money-Wage Dynamics and Labor-Market Equilibrium’. Journal of Political Economy, 76(4): 678–711.
Phelps, E.S. (1969). ‘The New Microeconomics in Inflation and Employment Theory’. American Economic Review, Papers and Proceedings, 59(2): 147–160.
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Snowdon, B. and H.R. Vane (1998). ‘Transforming Macroeconomics: An Interview with Robert E, Lucas, Jr.’. Journal of Economic Methodology, 5(1): 115–146.
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Spear, S.E. and R. Wright (1998). ‘Interview with David Cass’. Macroeconomic Dynamics, 2(4): 533–558.
Tamura, R. (1988). Fertility, Human Capital, and the Wealth of Nations. Doctoral thesis, University of Chicago.
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Clerc, P., De Vroey, M. (2022). Robert E. Lucas, Jr. (1937–). In: Cord, R.A. (eds) The Palgrave Companion to Chicago Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-01775-9_33
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