Nobel applauds economic revolutionary
Wednesday 11 October 1995
Professor Lucas, the fifth University of Chicago economics professor to win the prize in six years, transformed macro-economic analysis. In the course of a few years, from 1976 to 1982, he set in train one of the rare revolutions in economic thought. His hypothesis of "rational expectations" provided the theoretical underpinning for the resurgence of free market economics.
The theory boils down to the beautifully simple idea that economic agents - whether individuals negotiating wages, investors buying bonds or companies making investment plans - do not systematically get their forecasts wrong. On average, people will get their predictions of inflation, in particular, about right. And they definitely will not be wrong more often than governments.
Professor Lucas's insight swept the profession like wildfire. It meant, for instance, that economists could no longer defend the idea that by inflating the economy a government could permanently reduce unemployment. With rational expectations, workers will swiftly adjust wage claims to compensate, returning unemployment to its original level.
Economists who did not apply rational expectations in their own work had to start out by rebutting it - for example, by suggesting wage contracts prevented the rapid adjustment of wages to inflation expectations.
As well as an elegant theory, Professor Lucas, born in 1937, has a charisma rare in professional economists. His provoking lectures at Chicago and elsewhere in the US caught the imagination of a generation of graduate students at the turn of the last decade.
They swiftly went on to spread the rational expectations revolution, which had the side-effect of making the subject more mathematical.This occurred even though empirical evidence refuting the theory swiftly began to accumulate. Economists are reluctant to let the evidence stand in the way of a powerful theory.
Even the fiercest critics of the revolution and its powerful free-market consequences accept that Professor Lucas breathed new life into macroeconomic theory. But the cost of his revolution could in the end prove to be the fatal detatchment of economic theory from real life.
- 1 Man on naked bike ride gets ejected after becoming aroused
- 4 Ann Summers survey reveals the UK's favourite sex position
- 5 Ayyan Ali: Pakistan's top model now appears in the courtroom rather than on the catwalk
Man on naked bike ride gets ejected after becoming aroused
Caitlyn Jenner's mother Ester thought her daughter, formerly known as Bruce Jenner, had transitioned for money
Charles Kennedy 1959-2015: A gifted, compassionate politician whose career was cut short by the 'demon drink' - latest news
Charles Kennedy dead: A guy once asked the Lib Dem leader who his favourite Muppet was and his letter response was wonderful
Jaden Smith wears gender fluid dress to high school prom with Hunger Games actress
Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination
Migrants in Kos: Photos show real tragedy after Brits abroad complain of 'awkward' holidays
British tourists complain that impoverished boat migrants are making holidays 'awkward' in Kos
Michael Gove determined to scrap the Human Rights Act – even if Scotland retains it
Threat to scrap Human Rights Act could see UK follow Nazi example, warns UN official
Why this year's general election was the most unfair in Britain's history
iJobs Money & Business
£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...
£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...
£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...
£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...