Robert Lucas Jr is a Nobel prize winning economist most famous for developing the theory of Rational Expectations. He is widely regarded as an incredibly influential economist, with none other than Gregory Mankiw claiming that Lucas is “the most influential macroeconomist of the last quarter of the 20th Century.”
The Rational Expectations hypothesis caused a revolution in how economists thought about macro policy-making. Lucas incorporated the micro assumption of rational agents into macro models to assert that agents would use all available information to come to know the ‘true’ model of the economy that policy-makers use. Consequently, if, for instance, the government announced that they will increase the growth of the money supply to decrease unemployment, it would only work if the government increased money supply growth by more than agents expected; and the long-run effect would be higher inflation but not lower unemployment as agents eventually realise their mistakes and revise their expirations. This means that the government would have to act in an unstable manner to manage short-run macro targets.
Lucas also developed a ‘theory of supply’ in which he contends that agents can be tricked by unsystematic monetary policy. In addition, he also conjured up the ‘Lucas Paradox’ where he explains the reasons behind the small flow of capital from developed countries to the developing world. Moreover, Lucas, alongside Paul Romer in the 1980s and 1990s, led one of the first forays into endogenous growth theory. He also collaborated with Hirofumi Uzawa to create the ‘Uzawa-Lucas Model’. Furthermore, Lucas served as the President of the Econometric Society in 1997 and took the role of the President of the American Economic Association in 2002
Lucas truly revolutionized macroeconomics and his work inspired many other economists, like Edward Prescott and Finn Kydland, to begin their own research into business cycles and win their own Nobel prizes. Lucas’ work has been so influential that it even caused a resurgence by New Keynesian economists who built new models incorporating rational expectations.
“The consequences for human welfare involved in questions about human capital spillovers are simply staggering. Once one starts to think about them, it’s hard to think of anything else.”
“Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion most poisonous, is to focus on questions of distribution … The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.”
– Robert Lucas Jr