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TOPIC: ROBERT LUCAS JR (Economist Nobel Price Winner 1995)

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Bindu Mam Shamna M

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Robert Emerson Lucas, Jr

Robert Emerson Lucas, Jr. (born September 20, 1937) is an American economist at the University of Chicago. He received the Nobel Memorial Prize in Economic Sciences in 1995. He has been characterized by N. Gregory Mankiw as "the most influential macroeconomist of the last quarter of the 20th century."

Biography

He was born in 1937, in Yakima, Washington, the oldest child of Robert Emerson Lucas and Jane Templeton Lucas.

He received his B.A. in History in 1959 and Ph.D. in Economics in 1964, both from the University of Chicago. Lucas studied economics for his PhD on "quasi-Marxist" grounds. He believed that economics was the true driver of history, and so he planned to fully immerse himself in economics and then migrate back to the history department.[2] Following graduation, Lucas taught at the Graduate School of Industrial Administration (now Tepper School of Business) at Carnegie Mellon University until 1975, when he returned to the University of Chicago.

His ex-wife, Rita Lucas, upon their divorce in 1988, had a clause placed in their divorce settlement that she would receive half of any Nobel Prize won by Lucas in the next seven years. When Lucas did win the Nobel Prize in 1995 (falling just within the time limit), she was awarded half of the prize money. He has lived with

Nancy Stokey. They have collaborated in papers on growth theory, public finance, and monetary theory.

Robert Lucas has three sons, Stephen Lucas and Joseph Lucas.

A collection of Lucas' papers are housed at the Rubenstein Library at Duke University.

Contributions

Rational expectations

Lucas is well known for his investigations into the implications of the assumption of rational expectations. Lucas (1972) incorporates the idea of rational expectations into a dynamic general equilibrium model. The agents in Lucas's model are rational: based on the available information, they form expectations about future prices and quantities, and based on these expectations they act to maximize their expected lifetime utility. He also provide sound theoretical fundamental to Milton Friedman and Edmund Phelps's view of the long-run neutrality of money, and provide an explanation of the correlation between output and inflation, depicted by the Phillips curve.

Lucas critique

Lucas (1976) 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). 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 new classical macroeconomics and the drive towards microeconomic foundations for macroeconomic theory.

Other contributions

He developed a theory of supply that suggests people can be tricked by unsystematic monetary policy; the Uzawa–Lucas model (with Hirofumi Uzawa) of human capital accumulation; and the "Lucas paradox", which considers why more

capital does not flow from developed countries to developing countries. Lucas (1988) is a seminal contribution in the economic development and growth literature. Lucas and Paul Romer heralded the birth of endogenous growth theory and the resurgence of research on economic growth in the late 1980s and the 1990s.

He also contributed foundational contributions to behavioral economics, and has provided the intellectual foundation that enables us to understand deviations from the law of one price based on the irrationality of investors.

In 2003, he proclaimed, the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”

AWARDS

Robert Lucas was awarded the 1995 Nobel Prize in economics “for having developed and applied the hypothesis ofrational expectations, and thereby having transformed macroeconomic analysis and deepened our understanding of economic policy.” More than any other person in the period from 1970 to 2000, Robert Lucas revolutionized macroeconomic theory. His work led directly to the pathbreaking work offinnkydlandandedwardPrescott , which won them the 2004 Nobel Prize.

Before the early 1970s, wrote Lucas, “two very different styles of macroeconomic theory, both claiming the title ofKeynesian economics, co-existed.” One was an attempt to make macroeconomics fit with standardmicroeconomics.The problem with this was that such models could not be used to make predictions. The other style was macroeconometric models (seeforecasting and econometric models) that could be fit to data and used to make predictions but that did not have a clear relationship to economic theory. Many economists were working to unify the two, but economists themselves saw the results as unsatisfactory.

They reasoned that the short-run trade-off existed because when the government increased the growth rate of themoney supply, which increased prices, workers were fooled into accepting wages that appeared higher in real terms than they really were; they accepted jobs sooner than they otherwise would have, thus reducing unemployment. Lucas took the next step by formalizing this thinking and

extending it. He pointed out that in standard microeconomics, economists assume that people are rational. He extended that assumption to macroeconomics, assuming that people would come to know the model of the economy that policymakers use; thus the term “rational expectations.” This meant that if, say, the government increased the growth rate of the money supply to reduce unemployment, it would work only if the government increased money growth more than people expected, and the sure long-term effect would be higher inflation but not lower unemployment. In other words, the government would have to act unpredictably.