Lucas, Robert E., Jr.

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Lucas, Robert E., Jr. 1937-

Born September 15, 1937, in Yakima, Washington, Robert E. Lucas Jr. was the first child of the owners of the Lucas Ice Creamery, which did not survive the 1937–1938 downturn. After completing his BA in history at the University of Chicago in 1959, he enrolled in graduate school at the University of California at Berkeley, where he became interested in economic history and decided he needed more background in economics. This brought him back to the University of Chicago, where he became so interested in economics that he obtained his PhD in this field in 1964. Lucas worked at Carnegie Mellon University, originally known as the Carnegie Institute of Technology, until 1974, when he returned once again to the University of Chicago. In 1995 Lucas received the Nobel Memorial Prize in Economics “for having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeco-nomic analysis and deepened our understanding of economic policy.” Indeed he is often considered the preeminent macroeconomist of the last quarter of the twentieth century.

Lucas is one of the founding fathers of new classical macroeconomics, which contrasts sharply with the Keynesian insights that dominated macroeconomics through the 1960s. The new classical paradigm starts from the premise that economics has to account for the decisions made by firms and people in ways that are consistent with the idea of optimizing behavior, because ad hoc assumptions about their behavior are not compatible with the microfoundations of economic theory. At the same time Lucas criticized the typical Keynesian assumptions that markets do not clear and that economic agents do not always pursue optimizing strategies. In addition he challenged adaptive expectations economists for working with models that forecast better than agents, thereby leaving space for the non-neutrality of money in the short run. These insights are associated with, among others, Milton Friedman and Anna Schwartz. Instead, Lucas obliterated the distinction between the short run and the long run. Overall then Lucas may be viewed as replacing earlier ad hoc treatments with an approach squarely based on the microfoundations of incentives, information, and optimization.

Lucas has made contributions to a wide variety of fields, including financial economics, monetary theory, public finance, international economics, and economic growth. In the last he contributed the insights that human capital accumulation has significant external effects and that learning by doing plays an important role in the process of human capital accumulation. He is known especially for the so-called Lucas critique, according to which parameters of economic relationships are likely to change due to policy changes, rendering them unreliable for making policy recommendations. By overturning the basis for governmental fine-tuning, this transformed thinking on economic policy and inspired Lucas to develop powerful and operational methods for drawing conclusions from models that avoid this pitfall. In particular he is known for his efforts to embed theories in general equilibrium dynamics.

The attempts of Lucas and his colleagues to create microfoundations for macroeconomics ran into a major stumbling block in the shape of the Sonnenschein-Debreu-Mantel results, which established that the standard microeconomic model has almost no implications for macrobehavior. In response macroeconomists have turned to representative agent analysis (Kirman 1992) and endeavored to incorporate some kind of bounded rationality (Sargent 1993; Sent 1997). In some sense, this is moving them away from Lucas’s original insights.