Robert Lucas and Reality

 

“I guess everyone’s a Keynesian in the foxhole,” ruminated Robert Lucas.

Robert Lucas, the Nobel Prize winning economist, who drove the rational expectations revolution in macroeconomics and was famous for his Lucas Critique died this week. He was likely the most influential macro economist for the last 50 years based on his key work on rational expectations and policy. Whether you liked his work, or whether you believed it was an abstraction from reality, you must read and understand his thinking to study macroeconomics. 

Nevertheless, his comment on Keynesians in foxholes is a telling indictment on the transformation of economic theory to policy reality. Policymakers like to do something. They are activists, and crisis requires action. Lucas may not argue for no action, but his foundational thinking is that if action is expected the impact will be muted or at least unclear.