ROBERT E. LUCAS JR
Dynamics (Harvard University Press, 1989), co-authored with Nancy Stokey
and Edward Prescott; and Lectures on Economic Growth (Harvard University
Press, 2002).
Among the numerous articles he has written, the best-known include:
‘Expectations and the Neutrality of Money’, Journal of Economic Theory
(1972a); ‘Some International Evidence on Output–Inflation Tradeoffs’,
American Economic Review (1973); ‘Econometric Policy Evaluation: A
Critique’ in The Phillips Curve and Labor Markets (North-Holland, 1976);
‘On the Mechanics of Economic Development’, Journal of Monetary Economics
(1988); ‘Nobel Lecture: Monetary Neutrality’, Journal of Political
Economy (1996); and ‘Macroeconomic Priorities’, American Economic Review
(2003).
We interviewed Professor Lucas in New Orleans, in his hotel room, on 3
January 1997 while attending the annual conference of the American Economic
Association.
Background Information
As an undergraduate you studied history at the University of Chicago and
you also started graduate school as a student of history at Berkeley. Why did
you decide to switch to study economics as a postgraduate student back at
Chicago?
I was getting more interested in economics and economic history as a history
student. The work of Henri Pirenne, the Belgian historian, who stressed
economic forces influenced me. When I was at Berkeley I started taking some
economic history classes and even attended an economics course. That is
when I first learned what a technical field economics is and how impossible it
would be to pick it up as an amateur. I decided then that I wanted to switch to
economics. I didn’t have any hope of financial support at Berkeley to study
economics so that was what led me back to Chicago.
Did you find the techniques and tools used by economists difficult to master
when you did make the switch?
Sure, but it was exciting for me. I had no idea that people were using
mathematics for social science questions before I got into economics. Once I
became aware of that I enjoyed it enormously.
Was mathematics a strong subject for you when you were in high school?
In high school it was and in college I took a little bit, but dropped out. I was
not interested in hard science. I wasn’t really motivated to keep going in
274 Modern macroeconomics
maths, but when I learned how maths was being used in economics it rekindled
my interest in the field.
Which economists have had the most influence on your own work?
Dozens and dozens of people. Samuelson’s Foundations was a big influence
when I started graduate school. His book was just a bible for my generation
of economists. Friedman was a great teacher, really an unusual teacher.
Anyone from Chicago will tell you that.
In what respect? Was it his ability to communicate complex ideas?
That’s a hard question to answer. I think it was the breadth of problems he
showed that you could address with economic reasoning. That’s what Friedman
emphasized. No single problem was analysed all that deeply but the
range of problems included everything. So we got the impression, and rightly
so, that we were getting a powerful piece of equipment for dealing with any
problem that came up in human affairs.
To what extent did the work of the Austrians (Hayek and so on) influence your
ideas?
I once thought of myself as a kind of Austrian, but Kevin Hoover’s book
persuaded me that this was just a result of my misreading of Hayek and
others.
David Laidler [1992b] has drawn attention to what he described as ‘the
appalling low standards of historical scholarship amongst economists’. Is it
important for an economist to be a competent historian?
No. It is important that some economists be competent historians, just as it is
important that some economists be competent mathematicians, competent
sociologists, and so on. But there is neither a need nor a possibility for
everyone to be good at everything. Like Stephen Dedalus, none of us will
ever be more than a shy guest at the feast of the world’s culture.
Keynes’s General Theory and Keynesian Economics
You were born in 1937. The Great Depression was a huge influence on
economists such as Friedman, Samuelson and Tobin in stimulating their
interest in economics in the first place. Do you regard the Great Depression
as the premier macroeconomic event of the twentieth century?
I think that economic growth, and particularly the diffusion of economic
growth to what we used to call the Third World, is the major macroeconomic
event of the twentieth century. But the Great Depression is a good second. I
was too young to know what was going on at the time, but the Depression
Robert E. Lucas Jr 275
was the main influence on my parents. They became politically aware during
the 1930s. Politics and economics were issues that were always talked about
in my house when I was growing up.
How important do you think historical events are for theoretical developments?
For example it is generally recognized that the Great Depression led
to the General Theory.
Absolutely.
Do you think they are crucial?
Yes, I like that example.
What about the influence of increasing inflation in the 1970s? Do you think
that event played the same kind of role in the move away from Keynesian
economics, just as the Great Depression led to the development of Keynesian
economics?
The main ideas that are associated with rational expectations were developed
by the early 1970s, so the importance of the inflation that occurred was that it
confirmed some of these theoretical ideas. In a way the timing couldn’t have
been better. We were arguing that there was no stable Phillips curve relating
unemployment and inflation. You could go either way on that question given
the available post-war data up to the early 1970s, but by the end of the 1970s
it was all over.
How do you view Keynes as a macroeconomist?
I suppose Keynes, via Hicks, Modigliani and Samuelson, was the founder of
macroeconomics, so one has to view him as a leading figure in the field!
Robert Solow [1986] has described the General Theory as ‘the most influential
work of economics of the twentieth century, and Keynes as the most
important economist’. Yet the impression one gets from your various comments
on Keynes is that you find the General Theory almost incomprehensible.
You certainly don’t seem to regard it in the same light as Solow.
If you look through Solow’s collected writings for evidence of intellectual
indebtedness, evidence that scholars look for – citations and transfer of
ideas – you would find almost no influence of Keynes. So I think such
comments are somewhat disingenuous, unless he is thinking simply of
ideology. Of course Keynes is an extremely important figure in twentiethcentury
history, but I think his major influence was ideological. The
Depression followed soon after the Russian revolution, and there was a lot
of idealism about socialism as a way of resolving economic problems,
especially as the Soviet Union had no depression. Keynes went to great
276 Modern macroeconomics
lengths to disassociate himself from the rest of the economics profession in
the General Theory, making almost no references to mainstream economists
in the entire book, compared to the Treatise on Money which is full of
references to mainstream economists. The message of the General Theory,
in which he emphasized the seriousness of depressions, is that they can be
solved within the context of a liberal democracy without having to resort to
centralized planning. That was a highly important message which certainly
sustained defenders of democracy in countries like yours and mine that
maintained it. It helped to organize the entire world after the war and was
the flag around which liberal democracies rallied. The General Theory was
an unusually important book in that sense. Maybe more important than
economic theory. But that seems to be a different question from that of the
influence of Keynes’s theoretical ideas on the way we practise economics,
which I think is now very slight.
Should students of macroeconomics still read the General Theory?
No.
Had Keynes still been living in 1969, do you think he would have been
awarded the first Nobel Prize in Economics? Would he have received your
vote?
I thought Joan Robinson would get the first one, so my credentials as a Nobel
forecaster have been dubious from the start. But certainly Keynes would have
got one early on. Since I am not a member of the Swedish Academy, I do not
have a vote to cast.
Do you find it puzzling that both Keynes and Marshall started off as mathematicians
and yet both of them in terms of their methodology seemed to
downplay the use of mathematics in economics, not regarding it as an important
way of setting down economic ideas? Why do you think they turned away
from what was becoming a major trend in economic science?
When Marshall was educated, and even when Keynes was educated, England
was a mathematical backwater. If they had been educated in France, Germany
or Russia, working with people like Kolmogorov, Borel or Cantor, they
would have thought differently. Walras, Pareto and Slutzky thought differently.
The people who were giving birth to mathematical economics were
mainly on the continent at that time.
Is it your view that the traditional approach of distinguishing between
short-run and long-run forces in macroeconomics has been misconceived
and counterproductive? Did Keynes send everyone off down the wrong
track?
Robert E. Lucas Jr 277
The short-run–long-run distinction is Marshall’s, not Keynes’s. Indeed, Keynes
is quite explicit in the General Theory that he thinks that permanent stagnation
can result from demand deficiencies. Samuelson’s neoclassical synthesis
reclaimed the long run for neoclassical analysis, at least here in the USA.
Now Samuelson’s students – my whole generation – are trying to get the
short run back, too! It’s hard going, I know, but Samuelson already did the
easy part, and we have to make a living somehow.
The 1930s sent all of us off on the wrong track, starting with Keynes. Even
today, 50 years after the Depression ended, public figures talk about every
little wiggle in the GNP figures as though it were the end of capitalism. If
Keynes were alive today, he would take pride in his role in setting up the
system that permitted the recovery of Europe and the Japanese miracle, and
he would be excited about the prospects for integrating the second and third
worlds into the world economy. I think he would be as impatient with the
overemphasis on short-term fine-tuning as I am.
Monetarism
What were the major factors which contributed to the rise of monetarism
both in academia and policy circles during the 1970s?
It is hard for me to say because I was raised as a monetarist in the 1960s
[laughter].
Well, in the UK circumstances were very different, monetarist ideas came as
much more of a shock to many British economists who were steeped in what
Coddington [1976] has labelled ‘hydraulic Keynesianism’ and Samuelson
[1983] has referred to as the ‘Model T’ version of Keynes’s system.
Our leading Keynesian theorists, people like Tobin and Modigliani, always
had a role for money in their models and the models that I learnt as a graduate
student. Isn’t it true that in England monetarism is used as a much broader
label for the whole Thatcher programme?
The UK media has certainly tended to think of supply-side economics and
monetarism as being the same. Sometimes any belief in the market mechanism
and laissez-faire philosophy is also classified as being a part of
monetarism.
You can take the various elements separately and mix them any way you like.
Do you see Friedman as almost single-handedly having engineering a monetarist
counter-revolution?
Friedman has been an enormous influence. It is hard to say what would have
happened without him.
278 Modern macroeconomics
We know from our own experience as undergraduate students of economics in
the late 1960s in Britain that Friedman was often portrayed as some sort of
strange crank in Chicago.
Well, that was the way people tried to deal with him here too in a way, but not
successfully.
Moving on to Friedman’s 1968a AER article. In 1981 Robert Gordon described
it as probably the most influential article written in macroeconomics
in the previous 20 years, while more recently James Tobin [1995] has gone
much further when he described it as ‘very likely the most influential article
ever published in an economics journal’. What importance do you attach to
that particular article?
It had a huge influence on me. Leonard Rapping and I were doing econometric
work on Phillips curves in those days and that paper hit us right when we
were trying to formulate our ideas. Our models were inconsistent with Friedman’s
reasoning and yet we couldn’t see anything wrong with his reasoning.
It was a real scientific tension of trying to take two incompatible points of
view and see what adjustments you can make to end up in a coherent position.
Edmund Phelps was pursuing similar ideas. Phelps spelled out the
theory a little more clearly than Friedman did and he had an enormous
influence on me as well.
Was this with respect to the need for microfoundations?
Yes. I always think of the proposition that there is no long-run Phillips tradeoff
as the Friedman–Phelps proposition.
What do you feel remains of the monetarist counter-revolution today?
It has gone in so many different directions. Rational expectations macroeconomics
has gone in many different directions. There is real business cycle
theory which assigns no importance to monetary forces. This work has been
hugely influential, on me as well as on others, although I still think of myself
as a monetarist. Then there are those whom Sargent calls fiscalists, people
who think that government deficits are crucial events for the determination of
inflation and whether they are financed by bond issues or money issues is
secondary, or maybe not relevant at all. Then there are old-fashioned monetarists,
which is where I would class myself, with people like Friedman and
Allan Meltzer. One of the things that people are coming to agree on, although
not too many come right out and say it, is that econometrically it seems to be
hard to account for more than a quarter to a third of US real variability in the
post-war period to monetary forces, no matter how you look at the data.
People from very different points of view have come up with that as a kind of
upper bound. I used to think that monetary shocks were 90 per cent of the
Robert E. Lucas Jr 279
story in real variability and I still think they are the central story in the 1930s.
But there is no way to get monetary shocks to account for more than about a
quarter of real variability in the post-war era. At least, no one has found a
way of doing it.
One of the consensus propositions now is that monetary forces cause inflation,
certainly in the long term. That still leaves open the question, if we know
what causes inflation, why do governments insist on increasing the money
supply too rapidly? What are the forces which lie behind monetary expansions?
Well, to be fair, since the 1970s the advanced capitalist countries have what I
would regard as a fantastic record on inflation. Every central bank has shifted
its focus exclusively, or almost exclusively, on price stability. They have done
a great job. I like the idea of going from 3 per cent to 0, but the big thing is
going from 13 per cent to 3. Everyone would agree with that. So the record in
the advanced countries has just been tremendous, although there are a few
outliers in some Latin America countries where inflation is still a persistent
problem. Chile, though, has dealt with inflation forcefully and they have had
a solid record for ten years. Country after country is coming around to deal
with inflation by restricting money growth. But there is still ignorance and
there is always going to be a temptation to generate surprise inflation in order
to default on obligations.
Do you think that Democratic governments will tend to generate in the long
term more inflation than Republican governments because of their greater
announced commitment to employment targets?
Easy money and tight money have been an issue in the USA since the
nineteenth century. I guess it is a pretty good generalization that the Republicans
on the whole have been a tight money party.
According to Alberto Alesina’s [1989] rational partisan model it should
generally be better.
I think of Nixon and Ford as having been fairly inept at monetary policy
(laughter).
Alan Blinder [1986, 1988b, 1992b] has argued that during the 1970s American
Keynesianism absorbed the Friedman–Phelps proposition and that after
allowing for the effects of the OPEC supply shock, a modified Keynesian
model was quite capable of explaining the 1970s macroeconomic phenomena.
Do you think he is wrong?
The direct effect of the OPEC shock was minor in my opinion. I like to be
more explicit about which models are being discussed and what properties
280 Modern macroeconomics
are being boasted about. I don’t know what ‘modified Keynesian model’ Alan
is referring to.
In his view the expectations-augmented Phillips curve had become part of
mainstream macroeconomics by the mid-1970s and by then Keynesianism
had become ‘less crude’, having absorbed some of Friedman’s monetarist
arguments. However, rational expectations models remained controversial.
I don’t know how you would separate those two. But again I don’t know
whether Alan is referring to some body of research, or whether he just means
to say that he thinks he is pretty much on top of things [laughter].
New Classical Macroeconomics
Did you regard your work and that of your associates in developing new
classical macroeconomics as having created a separate school of thought
from monetarism?
I don’t like the collective, me and my associates [laughter]. I am responsible
for my work just as Sargent, Barro and Prescott are responsible for their own
work. When you are in the middle of doing research, it’s a paper-by-paper,
problem-by-problem kind of thing. You don’t say ‘I am a school and here is
what my school is going to do’. These labels get pasted on after the fact; they
don’t play much of a role. My most influential paper on ‘Expectations and the
Neutrality of Money’ [1972a] came out of a conference that Phelps organized
where Rapping and I were invited to talk about our Phillips curve work.
Phelps convinced us that we needed some kind of general equilibrium setting.
Rapping and I were just focusing on labour supply decisions. Phelps
kept on insisting that these labour suppliers are situated in some economy,
and that you have to consider what the whole general equilibrium looks like,
not just what the labour supply decision looks like. That’s what motivated
me. I didn’t think of it as being monetarist but I didn’t think of it as a new
school either.
Do you regard the new classical approach as having resulted in a revolution
in macroeconomic thought?
Sargent once wrote that you can interpret any scientific development as
continuous evolution or discontinuous revolution, at your pleasure. For myself,
I do not have any romantic associations with the term ‘revolution’. To
me, it connotes lying, theft and murder, so I would prefer not to be known as
a revolutionary.
One of the policy implications of new classical analysis is that there will be
no trade-off between inflation and unemployment even in the short run folRobert
E. Lucas Jr 281
lowing announced anticipated monetary expansion. How do you now view
this policy ineffectiveness proposition in the light of the disinflationary experience
of both the UK and the US economies in the early 1980s?
It is nearly impossible to tell what was and was not anticipated in any
particular episode, so the 1980s did not offer a crucial test of anything.
Sargent’s two essays on disinflation in his book Rational Expectations and
Inflation [1993] provide the best analysis of this issue, and a serious discussion
of what is meant by an ‘anticipated’ policy change.
The early 1980s witnessed the demise of your monetary surprise version of
the new classical model. On reflection, how do you view this work and what
do you think remains of that first phase of the new classical revolution?
I discuss this in my Nobel lecture [1996]. My models stress the distinction
between anticipated and unanticipated inflation and I arrived at that distinction
through an information-processing model. But other people have arrived
at the same distinction by thinking about contracts. There are many ways to
motivate that distinction. At the time I guess I thought my way of looking at it
was just a lot better than other people’s ways of looking at it [laughter]. Now
they all seem pretty similar to me. I think this distinction between anticipated
and unanticipated money, and how different their effects are, is the key idea
in post-war macro. I would like to see it embodied in better theoretical
models. I hope it doesn’t get forgotten or lost.
What do you regard as being the most serious criticisms that have been
raised in the literature against new classical equilibrium models?
To me the most interesting debates are not about classes of models but
about particular models. For example, Mehra and Prescott’s [1985] paper
on ‘The Equity Premium’ highlighted the failure of any neoclassical model
that we know about to account for the enormous differential between the
return on equity and the return on bonds. Now they certainly didn’t view
this fact as a failure of neoclassical economics as a body of thought, but on
the other hand it is undeniably a failure of a particular neoclassical model.
I think that is a much more fruitful way to proceed. I think general discussions,
especially by non-economists, of whether the system is in equilibrium
or not are almost entirely nonsense. You can’t look out of this window and
ask whether New Orleans is in equilibrium. What does that mean? [laughter].
Equilibrium is just a property of the way we look at things, not a
property of reality.
Many critics of new classical macroeconomics have argued that there is a
lack of available supporting evidence of strong intertemporal labour substitution
effects. How do you react to this line of criticism?
282 Modern macroeconomics
I’m not at all sympathetic to it. I don’t know what you mean by the ‘available
evidence’. The degree of intertemporal substitution of labour assumed in real
business cycle models is selected to generate employment fluctuations of the
magnitude we observe, which is to say, to be consistent with some of the
‘available evidence’. Economists who have used survey data on individuals
have been unsuccessful in explaining employment fluctuations at the individual
level – we just haven’t learned anything about preferences from their
work. This is a disappointment, but no good purpose is served by reinterpreting
this failure as though it were a successful attempt to estimate something.
Do you consider your 1972 Journal of Economic Theory paper on ‘Expectations
and the Neutrality of Money’ to be your most influential paper?
It seems to be, or maybe the paper on policy evaluation [1976].
How important do you think the ‘Lucas critique’ has been?
I think it has been tremendously important, but it is fading. It used to be that
you could hold that up, like a cross to a vampire, and defeat people simply by
saying ‘Lucas critique’. People have gotten tired of that and I think that is fair
enough. If you want to criticize work effectively you have to get into it and
criticize its details. But I think it is basic that you can’t get economic conclusions
without putting in some economic theories, some economic structure.
Your 1978 paper with Thomas Sargent ‘After Keynesian Macroeconomics’
seemed to be pronouncing the death of Keynesian macroeconomics. Do you
now think that this was perhaps premature given its revival in the form of new
Keynesian economics?
Well, the label ‘Keynesian’ is a flag a lot of people salute, so it’s not going to
lie around unused. Of course Sargent and I were talking about a particular set
of models which we were completely clear about.
You were talking about 1960s-style Keynesian models?
The Wharton model, the Michigan model, the MPS model, models which
existed and were in some sense Keynesian. If a completely different class of
models comes up which people like to call Keynesian, of course our criticisms
can’t apply. You can’t write a paper in 1978 criticizing work done in
1988 [laughter].
That [1978] paper contains a lot of powerful rhetorical statements. Were you
conscious of this at the time of writing?
Yes. We were invited to a conference sponsored by the Boston Fed. In a way
it was like being in the enemy camp and we were trying to make a statement
that we weren’t going to be assimilated.
Robert E. Lucas Jr 283
Real Business Cycle Theory
In your 1980 paper ‘Methods and Problems in Business Cycle Theory’ you
seem to be anticipating in some respects the next decade’s work. You appear
to be asking for the kind of methodological approach which Kydland and
Prescott were about to take up. Were you aware of what they were doing at
the time?
Yes. But I wasn’t anticipating their work.
But your statements in that paper seem to be calling for the kind of methodology
that they have used.
Well, Prescott and I have been very close for years and we talk about everything.
But if you’re asking whether at the time I wrote that paper I had an idea
that you could get some sort of satisfactory performance out of a macroeconomic
model in which the only disturbances were productivity shocks, then
the answer is no. I was as surprised as everybody else when Kydland and
Prescott showed that was possible [laughter].
Is it fair to say that you, Friedman, Tobin and other leading macroeconomists
up until 1980 tended to think of a long-run smooth trend around which there
are fluctuations?
Yes.
Basically differences of opinion concerned what caused these fluctuations
and what you could do about them. Then Kydland and Prescott [1982] came
along and changed that way of thinking.
Well, they talk about business cycles in terms of deviations from trend as
well. The difference is that Friedman, Tobin and I would think of the sources
of the trend as being entirely from the supply side and the fluctuations about
trend as being induced by monetary shocks. Of course we would think of
very different kinds of theoretical models to deal with the long-run and the
short-run issues. Kydland and Prescott took the sources that we think of as
long term to see how well they would do for these short-term movements.
The surprising thing was how well it worked. I am still mostly on the side of
Friedman and Tobin, but there is no question that our thinking has changed a
lot on the basis of this work.
In an article in Oxford Economic Papers Kevin Hoover [1995b] has suggested
that ‘the calibration methodology, to date, lacks any discipline as
stern as that imposed by econometric methods … and above all, it is not clear
on what standards competing, but contradictory models are to be compared
and adjudicated’. Does this pose a problem?
284 Modern macroeconomics
Yes, but it is not a problem that’s resolved by Neyman–Pearson statistics.
There the whole formalism is for testing models that are nested. It has always
been a philosophical issue to compare non-nested models. It’s not something
that Kydland and Prescott introduced. I think Kydland and Prescott are in
part responding to the sterility of Neyman–Pearson statistical methods. These
methods just don’t answer the questions that we want to answer. Maybe they
do for studying the results of agricultural experiments, or something like that,
but not for dealing with economics.
Would you agree with the view that a major contribution of the real business
cycle approach has been to raise fundamental questions about the meaning,
significance and characteristics of economic fluctuations?
I think that is true of any influential macroeconomics. I don’t think that
statement isolates a unique contribution of real business cycle theory.
In commenting on recent developments in new classical economics Gregory
Mankiw [1989] has argued that although real business cycle theory has ‘served
the important function of stimulating and provoking scientific debate, it will [he
predicts] ultimately be discarded as an explanation of observed fluctuations’.
What are your predictions for the future development of macroeconomics?
I agree with Mankiw, but I don’t think he understands the implication of his
observation. We are now seeing models in the style of Kydland and Prescott
with nominal rigidities, imperfect credit markets, and many other features
that people thinking of themselves as Keynesians have emphasized. The
difference is that within an explicit equilibrium framework we can begin to
work out the quantitative implications of these features, not just illustrate
them with textbook diagrams.
New Keynesian Economics
When we interviewed Gregory Mankiw in 1993 [see Snowdon and Vane,
1995] he suggested that ‘the theoretical challenge of Lucas and his followers
has been met’ and that Keynesian economics is now ‘well founded on
microeconomic models’. Do you think that new Keynesians such as Mankiw
have created firm microeconomic foundations for Keynesian models?
There are some interesting theoretical models by people who call themselves
‘new Keynesians’. I don’t know who first threw out this challenge but I
would think it was Patinkin. When I was a student this idea of microfoundations
for Keynesian models was already on everyone’s agenda and I thought of
Patinkin as the leading exponent of that idea.
Keynesian models in the 1960s, and this is what excited people like Sargent
and me, were operational in the sense that you could quantify the effects of
Robert E. Lucas Jr 285
various policy changes by simulating these models. You could find out what
would happen if you balanced the budget every year, or if you increased the
money supply, or changed fiscal policy. That was what was exciting. They
were operational, quantitative models that addressed important policy questions.
Now in that sense new Keynesian models are not quantitative, are not
fitted to data; there are no realistic dynamics in them. They are not used to
address any policy conclusions. What are the principal policy conclusions of
‘new Keynesian economics’? Ask Greg Mankiw that question the next time
you interview him [laughter]. I don’t even ask that they prove interesting
policy conclusions, just that they attempt some. Everyone knows that Friedman
said we ought to expand the money supply by 4 per cent per year. Old
Keynesians had similar ideas about what we ought to do with the budget
deficit, and what they thought the effects of it would be. New Keynesian
economics doesn’t seem to make contact with the questions that got us
interested in macroeconomics in the first place.
In Europe, where currently unemployment is a much bigger problem compared
to the USA, some new Keynesian work has tried to explain this
phenomenon in terms of hysteresis effects. This work implies that Friedman
[1968a] was wrong when he argued that aggregate demand disturbances
cannot affect the natural rate. So in that sense some new Keynesian economists
are trying to address the problem of unemployment, suggesting that
aggregate demand management still has a role to play.
When Friedman wrote his 1968 article the average rate of unemployment in
the USA was something like 4.8 per cent and the system always seemed to
return to about that level. Since then the natural rate has drifted all over the
place. It looked much more like a constant of nature back in those days than
it does now. Everyone would have to agree with that. That is not a theory but
an observation about what has happened. Now in Europe the drift upwards
has been much more striking. Unemployment is a hugely important problem.
But I don’t want to call anyone who notes that that is a problem a Keynesian.
Ljungqvist and Sargent (1998) have done some very exciting work on this,
trying to make the connections between the European welfare state and
unemployment rates. I don’t know whether they have got it right or not.
That has also been a theme of Patrick Minford et al.’s [1985] work in the UK.
It is a tough theme to defend though, because the welfare state has been in
place for 30 years more or less in its present form in most European countries.
Perhaps the best way is to identify changes within the incentive structure
rather than the level of benefits.
286 Modern macroeconomics
Yes, that is what you have got to do. Ljungqvist and Sargent try to address
that issue as well.
General and Methodological Issues
Do you think it is healthy to subject students to a breadth of perspectives at
the undergraduate level?
I don’t know. I teach introductory macro and I want my students to see
specific, necessarily pretty simple, models and to compare their predictions
to US data. I want them to see for themselves rather than just be told about it.
Now that does give a narrowness to their training. But the alternative of
giving them a catalogue of schools and noting what each says without giving
students any sense of how economic reasoning is used to try to account for
the facts is not very attractive either. Maybe there is a better way to do it.
Have you ever thought of writing a basic introductory textbook?
I have thought a lot about it, but it would be hard to do. I sat down once with
my course notes, to see how far the notes I had been using over the years
were from a textbook, and it was a long long way [laughter]. So I have never
done it.
Is the philosophy of science and formal methodology an area that interests
you?
Yes. I don’t read very much in the area but I like to think about it.
You acknowledge that Friedman has had a great influence on you, yet his
methodological approach is completely different to your own approach to
macroeconomics. Why did his methodological approach not appeal to you?
I like mathematics and general equilibrium theory. Friedman didn’t. I think
that he missed the boat [laughter].
His methodological approach seems more in keeping with Keynes and
Marshall.
He describes himself as a Marshallian, although I don’t know quite what that
means. Whatever it is, it’s not what I think of myself as.
Would you agree that the appropriate criterion for establishing the fruitfulness
of a theory is the degree of empirical corroboration attained by its
predictions?
Something like that. Yes.
You are Friedmanite on that issue of methodology?
Robert E. Lucas Jr 287
I am certainly a Friedmanite. The problem with that statement is that not all
empirical corroborations are equal. There are some crucial things that a
theory has to account for and if it doesn’t we don’t care how well it does on
other dimensions.
Do you think that it is crucial for macroeconomic models to have neoclassical
choice-theoretic microfoundations?
No. It depends on the purposes you want the model to serve. For short-term
forecasting, for example, the Wharton model does very well with little in the
way of theoretical foundations, and Sims, Litterman and others have had
pretty good success with purely statistical extrapolation methods that involve
no economics at all. But if one wants to know how behaviour is likely to
change under some change in policy, it is necessary to model the way people
make choices. If you see me driving north on Clark Street, you will have
good (though not perfect) predictive success by guessing that I will still be
going north on the same street a few minutes later. But if you want to predict
how I will respond if Clark Street is closed off, you have to have some idea of
where I am going and what my alternative routes are – of the nature of my
decision problem.
Why do you think there is more consensus among economists over microeconomic
issues compared to macroeconomic issues?
What is the microeconomic consensus you are referring to? Does it just mean
that microeconomists agree on the Slutsky equation, or other purely mathematical
propositions? Macroeconomists all take derivatives in the same way,
too. On matters of application and policy, microeconomists disagree as vehemently
as macroeconomists – neither side in an antitrust action has any
difficulty finding expert witnesses.
I think there is a tremendous amount of consensus on macroeconomic
issues today. But there is much that we don’t know, and so – necessarily – a
lot to argue about.
Do you see any signs of an emerging consensus in macroeconomics, and if
so, what form will it take?
When a macroeconomic consensus is reached on an issue (as it has been, say,
on the monetary sources of inflation) the issue passes off the stage of professional
debate, and we argue about something else. Professional economists
are primarily scholars, not policy managers. Our responsibility is to create
new knowledge by pushing research into new, and hence necessarily controversial,
territory. Consensus can be reached on specific issues, but consensus
for a research area as a whole is equivalent to stagnation, irrelevance and
death.
288 Modern macroeconomics
In what areas, other than the monetary sources of inflation, do you think
there is now a consensus in macro? Do you think, for example, that there is a
majority of economists who are now anti fine-tuning?
Yes. Fine-tuning certainly has come down a few pegs. Paul Krugman has
been doing a lot of very effective writing attacking non-economists writing
about economic matters. Paul is speaking for the whole profession in a very
effective way and addressing the most important questions in social science.
Economists have a lot of areas of agreement, partly due to the fact that we
look at numbers. If somebody says the world is breeding itself into starvation,
we look at numbers and see that per capita incomes are rising in the
world. It seems to be that on a lot of questions there is a huge amount of
consensus among economists. More and more we are focusing on technology,
supply-side, long-run issues. Those are the big issues for us now, not on
depression prevention.
Economic Growth
In their recent book on economic growth Robert Barro and Xavier Sala-i-
Martin [1995] express the view that ‘economic growth is the part of
macroeconomics that really matters’. In your Yrjo Jahnsson lectures [1987]
you seem to be saying something similar, that macroeconomists have spent
too much time on stabilization and neglected growth, which is a far more
important issue for macroeconomics to look at.
Yes. That is becoming the consensus view. David Romer’s new textbook,
which we use in our first-year graduate macro course at Chicago, begins with
growth. Romer would call himself a new Keynesian and he is perfectly
entitled to call himself that. But his book shows a shift in emphasis towards
long-run growth questions. Quite rightly, I think.
So it’s back to the classics and the grand issues of the long run?
Yes. OK [laughter].
What in your view was the stimulus to the new endogenous growth economics?
Was it the lack of convergence which people were observing empirically
between rich and poor countries, apart from maybe a ‘convergence club’?
No. What is new about the new growth theory is the idea that what we
ought to be trying to do is get a single neoclassical model that can account
for rich and poor countries alike in the same terms. This contrasts with the
view that we had in the 1960s that there was one theory for the advanced
countries and some other model was needed for the Third World. The whole
presumption in the 1960s was that some explicit policy, perhaps based on
the Russian model, was needed to promote development in poor countries.
Robert E. Lucas Jr 289
We didn’t think of economic growth as something that just happened through
market forces.
What do you see as being the important policy implications of the work that
has been done so far on endogenous growth? Some economists have interpreted
the work as suggesting that there is a more positive role for government
than, say, was the case with the Solow model.
Yes. An implication of the Solow model was that the long-term growth rate of
an economy was dictated by technological change and there wasn’t anything
we could do about it. Some of the endogenous growth models have the
property that the long-term growth rate is endogenously determined and that
changes in the tax structure, for example, can influence what that growth rate
is. We can now use these new models to analyse the growth effects of
changes in tax policy. That is something we couldn’t do before. But these
effects I think are pretty small. Even where you have a model where growth
rates can be changed by policy the effects seem to be pretty modest.
What in your view is the reason why the ‘Tiger’ economies of South East Asia
have been so successful? While the Tiger economies have been catching up
with the West with 8 or 9 per cent growth rates, in Africa the 1980s was
almost a completely lost decade as far as economic growth was concerned.
Well, you know Africa has had awful politics.
Do you think African countries generally lack the necessary institutional
framework required for successful development?
No. There has been much too much socialist influence. The common feature
of countries like Taiwan, Korea and Japan is that they have had some kind of
conservative, pro-market, pro-business, economic policies. I mean I wouldn’t
exactly call them free trade because Japan and Korea at least are very mercantilist
in their trade policies, which I don’t approve of. But it is better than
socialism and import substitution by a long, long way.
While they have been outward-looking, some development economists would
argue that within many of the South East Asian Tiger economies there has
been quite a lot of government intervention. As such they see it as being an
example of successful government intervention.
Right. That is how everybody in Japan and Korea sees it [laughter].
You don’t see it that way?
Even Chicago Korean students think that the Korean growth rates have been
engineered by government manipulation. I don’t agree with that view. I don’t
see any evidence for that at all. But it is hard to refute. There is no question
290 Modern macroeconomics
that governments have been extremely active in doing things that they think
promote economic growth.
Economic Policy
In your 1978 AER paper on ‘Unemployment Policy’ you suggested that
macroeconomic analysis would make better progress if the concept of involuntary
unemployment were abandoned. Many economists, for example Kevin
Hoover [1988, 1995c], have criticized you for this and question whether you
can regard unemployment as simply voluntary.
There is both an involuntary and a voluntary element in any kind of unemployment.
Take anybody who is looking for a job. At the end of the day if
they haven’t found one, they are unhappy about it. They did not choose to
find one in some sense. Everyone wishes he has better options than he does.
But there is also obviously a voluntary element in unemployment when there
are all these jobs around. When we are unemployed it is because we think we
can do better.
I suppose this is something that bothers Europeans more because aggregate
unemployment is much more of an issue in Europe. It doesn’t seem to be as
much of an issue in the USA.
It should be.
Many European economies including Germany, France and Italy are currently
experiencing unemployment rates in excess of 10 per cent.
Well, if you go into the neighbourhoods within a mile of my university you
will find 50 per cent unemployment rates. So it is an issue here too.
The Bank of England is less independent than the German Bundesbank. Do
you see that as a possible reason why Britain’s inflation performance has
been less successful than that of Germany?
I don’t know, it could be. I don’t feel I have much understanding of the
political sources of differences in monetary policy across countries.
Economic policy doesn’t seem to have been guided by new classical theoretical
developments in the same way as it has by Keynesianism and monetarism.
Why has its impact been less influential in economic policy making?
Why do you say that? We have talked about the increasing focus of central
bankers on inflation and the de-emphasis of everybody on fine-tuning. That is
an important trend in the last 20 years in the USA and Europe, and to my
mind a very healthy one.
Robert E. Lucas Jr 291
Would this not have come about in any case as a result of Friedman’s
influence, without rational expectations and equilibrium theorizing?
Maybe.
Have you ever been invited to be an economic adviser in Washington? Is that
a role you see for yourself?
No.
You once made a comment [Lucas, 1981c] that ‘as an advice-giving profession
we are in way over our heads’. Is that the reason you haven’t considered
such a role more seriously?
No. Not at all. I believe economists ought to run everything [laughter].
So did Keynes.
I know. I don’t think I personally have any particular talent or liking for that
kind of role. But I am glad that other people like John Taylor or Larry
Summers do. For example, I think that the whole reason the Clinton health
insurance reform fell on its face was that not enough economists were involved.
I like economics and I think economics is hugely relevant on almost
any issue of national policy. The more good economists are involved the
happier I am. But I don’t personally feel drawn to doing it.
What are your views on European Monetary Union?
Again I don’t know enough about the politics, which has to be central.
Does it make economic sense to you?
Well, it’s an issue in inventory theory. The cost of dealing with multiple
currencies is that if you are doing business in Europe you, or people you hire
to help you, have to have stocks of inventories of a lot of different currencies
because payments are coming due in a lot of different currencies. The inventory
cost of holding money is the interest foregone you could have earned by
holding interest-bearing assets. If you have a common currency you can
consolidate your cash inventories so that there is a saving involved. That is a
very modest saving, but it is positive. But obviously multiple currencies are
not inconsistent with a huge amount of prosperity. If you can consolidate, all
the better, but those purely economic gains are pretty modest. If you don’t
trust somebody else to run your monetary policy, maybe you want to oppose
monetary union. For myself, I would be happy to turn my monetary policy
over to the Germans any day [laughter].
292 Modern macroeconomics
Personal Information
When we interviewed Milton Friedman [see Snowdon and Vane, 1997b] he
commented that he had experienced three reactions to many of his views, to
quote: ‘the first reaction is that it’s all a bunch of nonsense, the second
reaction is that there is something to it and the third reaction is that it gets
embedded in the theory and nobody talks about it anymore’. How well does
this parallel with new and controversial ideas you have fought to get accepted?
A little bit. But you know Milton is like Keynes. He goes directly to the
public, to the voters, with ideas. The reactions he is talking about are the
reactions of non-economists, of politicians, of a huge range of people, to the
changes in policies he is advocating. My career hasn’t really taken that form.
My influence has been very much more inside the profession and for that
matter on a technical subset of the profession. In so far as I have had any
influence on the larger world you can’t really identify it because my influence
is contained with the influence of many others. How do you tell my influence
from Tom Sargent’s influence? Nobody other than professional economists
would even have heard of me. No one in the US Congress is going to say ‘I
favour Lucas’s policy’. The reply would be, ‘who is Lucas?’! [laughter].
Turning to the award of the Nobel Prize. When we interviewed James Tobin in
1993 and asked him how he felt about being awarded the Prize his reaction
was somewhat defensive along the lines that he didn’t ask for it; the Swedish
Academy gave it to him. In correspondence we asked Milton Friedman a
similar question and he acknowledged that it was extremely rewarding. He
also told us that he first learned of the award from a reporter who stuck a
microphone in his face when he was in a parking lot in Detroit. We were
wondering what importance you attach to having been awarded the Nobel
Prize.
Oh, it was a tremendous thing for me. I don’t know what else I can say. I
don’t know what Jim could possibly have had in mind. He was certainly
pleased when it happened and he certainly merited the award. Reporters will
ask you, and this annoys me too after a while, ‘what did you do to deserve
this prize?’ They should look up what the Swedish Academy said on the
Internet. I don’t want to have to defend it. If that is what Jim meant, then I
have been through the same thing and I am just as irritated by it as he is.
What issues or areas are you currently working on?
I’m thinking about monetary policy again, actually. In particular all central
banks now want to talk about the interest rate as being the immediate variable
they manipulate. I don’t get it and yet their record on controlling inflation is
Robert E. Lucas Jr 293
pretty good. Talking in terms of interest rate targets as opposed to monetary
targets seems to me just the wrong way to think about it, but if so, why does it
work so well?
Finally, is there any question that you would have liked to have been asked in
this interview?
I don’t know [laughter]. Your questions are interesting to me. You guys are
economists and it’s a lot more fun being interviewed by an economist than
being interviewed by a journalist who is completely ignorant of economics
[laughter].
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