The lasting influence of Robert E. Lucas on Chicago economics

ABSTRACT

This paper is an overview from a personal perspective on the various ways Lucas has shaped today’s economics in general and in terms of ‘Chicago economics’ in particular. In honor of the 50th anniversary of its publication, much focus is given to his 1972 neutrality paper and its impact. I discuss how the paper was a trigger of the subsequent emergence of rational expectations macroeconomics. Further, I touch upon his fundamental contributions to growth theory, asset pricing and the characteristic use of the Bellman equations. After covering these topics, the paper concludes with a portrayal of the Money and Banking Workshop to describe the environment that Lucas established at the Chicago department, and to illustrate his enduring influence on the culture of teaching and discussing macroeconomics at the University of Chicago.

KEYWORDS:

• Robert E. Lucas
• Chicago economics
• monetary neutrality
• microfoundations
• business-cycle theory
• growth theory

Acknowledgements

I am grateful to the continuous encouragement and guidance by Peter Galbács. He went beyond the call of duty not only in his cheerful enthusiasm and productive prodding, but also in offering exceptional guidance, detailed reading, many constructive suggestions, and much help. All errors and inaccuracies are mine, of course.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Fischer (1996) provides a detailed and comprehensive account.

2 In his own words, ‘there is no question that social convention and institutional structures affect […] [observable behavioral] patterns, but conventions and institutions do not simply come out of the blue, arbitrarily imposing themselves on individual agents. On the contrary, institutions and customs are designed precisely in order to aid in matching preferences and opportunities satisfactorily. Taking into account theoretically […] the complicated arrangements we observe in actual labor and product markets would not be a step toward constructing an alternative model to the one Rapping and I used [in (Lucas & Rapping, 1969)], but toward an extension or elaboration’ (Lucas, 1981, p. 4). To show how overwhelming this idea is, it is instructive to mention two examples. First, having abandoned the notion of social institutions as emerging independently of the individual, new institutional economics today shows great interest in portraying social institutions as the outcomes of the rational and deliberate considerations of the members of societies (Levinthal, 1988; Rutherford, 1994). And second, New Keynesians’ staggered wage and price setting literature (Fischer, 1977; Phelps & Taylor, 1977; Taylor, 1979; 1980; Ball & Romer, 1987) (Ball & Cecchetti, 1987; Mankiw, 1985) came out as a response to Lucas’ microfoundational program to show that the absence of instantaneous market clearing and wholly flexible prices may be the outcomes and not the failure of individual rational optimization (Ball et al., 1988, pp. 1–2).

3 In many private conversations, I often find it remarkable how eagerly people wish the government to impose certain choices on others but would steadfastly refuse others to have the government impose choices on themselves. There are exceptions, of course. Traffic rules are a good example for mutually acceptable restrictions on choices. I only wish that people would more generally only seek to impose on others, what others should then feel free to impose on them in turn, and which are not tilted towards the preference of the person in question. Not everyone likes broccoli, but some do. Personal tastes and preferences are worth respecting.

4 As opposed to its Friedmanian version (Friedman, 1968; 1977) where the short-run trade-off did not disappear but moved upwards relating higher and higher levels of inflation to the same rates of unemployment.

5 This quote is often attributed to Santayana (1905), though the exact quote there is somewhat different.

6 This paradox may not be confined to economics. With the development of quantum theory and thus the random determinants of everything in nature, physicists, psychologists and philosophers have grappled with the vexing notion of a ‘free will’ and its relationship to the laws of physics. Should a murderer perhaps go free, because one cannot really fault him for some unfortunate sequence of random quantum fluctuation stochastically leading to the outcome of a horrible crime? Clearly not, but a logically consistent argument is tricky to arrive at from a physics perspective. Planck (1923) provides an early and prominent take on the issue, Conway and Kochen (2009) provide a more recent one and the most humorous take is the poem ‘Ein Wirkungsquant fliegt durch das Dorf’ by B. Hassenstein. An economist would instead think about incentives, and predict resulting behavior.

7 This is an essential difference to Gale (1967), see Romer (1986b).

8 There are sometimes passionate debates whether that amount should have the subscript t=0 for the date at which it is determined, or t=1 for the date at which it can be used next. I lean towards the first for reasons of compatibility with measurability notation. Others lean towards the second, ultimately motivated by the corresponding continuous-time approach. Either way works with appropriate care.

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Harald Uhlig

Harald Uhlig is the Bruce Allen and Barbara Ritzenthaler Professor in Economics at the Kenneth C. Griffin Department of Economics, the University of Chicago and at the College. He joined the Chicago faculty in 2007 and served as its Chairman between 2009 and 2012. Previously, he was assistant professor of economics at Princeton University (1990–1994), research professor for macroeconomics at Tilburg University (1994–2000), and professor of economics at Humboldt Universität (2000–2007). He served as the co-editor of Econometrica between 2006 and 2010, and as the lead editor of the Journal of Political Economy from 2013 to 2021. He is a consultant of the Bundesbank and the Bank for International Settlements. He chaired the CEPR European Business Cycle Dating Committee from 2005 to 2012 and he is a member of the National Bureau of Economic Research. He was awarded the Gossen Prize of the Verein für Socialpolitik in 2003, and in the same year was selected as a Fellow of the Econometric Society. He completed his PhD degree under Christopher A. Sims’ supervision at the University of Minnesota in 1990. As a macroeconomist, Harald’s main research interests cover issues in applied quantitative theory and applied dynamic stochastic general equilibrium theory related to business cycles and growth, economic policy and monetary economics, as well as financial economics and time series econometrics.