Robert E. Lucas Jr. (Nobel 1995) has died. I will not try here to provide an overview of his work. For those who are interested in more detail, here are a few starting points.
Lucas was awarded the Nobel prize “for having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeconomic analysis and deepened our understanding of economic policy.” V.V. Chari provides an overview of that work in “Nobel Laureate Robert E. Lucas, Jr.: Architect of Modern Macroeconomics,” in the Winter 1998 issue of the Journal of Economic Perspectives. I wrote a post on this blog about a year ago on the 50th anniversary of one of his most prominent papers, the 1972 “Expectations and the Neutrality of Money.”
In the late 1980s, Lucas began to focus more of his attention on issues of long-run growth. In what I think was his first prominent paper on the subject, he famously wrote (“On the Mechanics of Economic Development, Journal of Monetary Economics, 1988, pp. 3-42):
Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what, exactly? If not, what is it about the’ nature of India’ that makes it so? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.
In the Winter 2000 issue of the Journal of Economic Perspectives, Lucas applied some of these growth model ideas in “Some Macroeconomics for the 21st Century,” offering a long-run prediction that the world economy would become both much richer and much more equal over time, as countries that have been laggards in growth took advantage of possibilities for catch-up growth.
What I wanted to emphasize was that Lucas, among his other gifts, was a gifted writer and expositor. This gift wasn’t always readily apparent, because his research papers often intertwined verbal and algebraic exposition in a way that could be inaccessible to the uninitiated. Here are three examples that come immediately to mind.
One example is tacked up to the bulletin board outside my office. It’s from an essay on economic growth that Lucas wrote for the 2003 Annual Report of the Federal Reserve Bank of Minneapolis:
Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother. This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. 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.
Whether you agree with the sentiment or not (personally, I’m about 85% agreement on this one), it’s a strong piece of prose writing.
Here’s another example from his 2000 JEP essay on economic growth. This is Lucas describing a model in words–specifically, describing how he sees the pattern of economic growth across countries as a kind of horse race with rules of its own:
We begin, then, with an image of the world economy of 1800 as consisting of a number of very poor, stagnant economies, equal in population and in income. Now imagine all of these economies lined up in a row, each behind the kind of mechanical starting gate used at the race track. In the race to industrialize that I am about to describe, though, the gates do not open all at once, the way they do at the track. Instead, at any date t a few of the gates that have not yet opened are selected by some random device. When the bell rings, these gates open and some of the economies that had been stagnant are released and begin to grow. The rest must wait their chances at the next date, t + 1. In any year after 1800, then, the world economy consists of those countries that have not begun to grow, stagnating at the $600 income level, and those countries that began to grow at some date in the past and have been growing every since. …
The exact construction … is based on two assumptions. … The first is that the first economy to begin to industrialize—think of the United Kingdom, where the industrial revolution began—simply grew at the constant rate α from 1800 on. I chose the value α = .02 which … implies a per capita income for the United Kingdom of $33,000 (in 1985 U.S. dollars) by the year 2000. There is not much economics in the model, I agree, but we can go back to Solow (1956) and to the many subsequent contributions to the theory of growth for an understanding of the conditions under which per capita income in a country will grow at a constant rate. In any case, it is an empirically decent description of what actually happened.
So much for the leading economy. The second assumption is that an economy that begins to grow at any date after 1800 grows at a rate equal to α = .02, the growth rate of the leader, plus a term that is proportional to the percentage income gap between itself and the leader. The later a country starts to grow, the larger is this initial income gap, so a later start implies faster initial growth. But a country growing faster than the leader closes the income gap, which by my assumption reduces its growth rate toward .02. Thus, a late entrant to the industrial revolution will eventually have essentially the same income level as the leader, but will never surpass the leader’s level.
At least for me, this description of a racetrack, with the leader getting an early start and others having the ability to draw upon catch-up growth (because they can rely on skills and knowledge already invented) is a powerful way to describe an underlying algebraic model that illuminates overall patterns of long-run growth. The prose here isn’t flashy, but it is succinct and crystalline. Based on this model, Lucas wrote: “I think the restoration of inter-society income equality will be one of the major economic events of the century to come. Of course, this does not entail the undoing of the industrial revolution. In 1800 all societies were equally poor and stagnant. If by 2100 we are all equally rich and growing, this will not mean that we haven’t got anywhere!”
Finally, here’s an example from the short “banquet speech” that Lucas gave in accepting the Nobel prize, with a deathbed thought. Here’s the speech in full:
Your Majesties, Ladies and Gentlemen,
As you all know, Alfred Nobel did not choose to establish a prize in Economics. This prize was established in the 1960s, as a memorial, through the generosity of the Bank of Sweden. Generosity and, I would say, wisdom, as the establishment of a Nobel Prize in Economics has had a very beneficial effect on my profession, encouraging us to focus on basic questions and scientific method. It is as if by recognizing Economics as a science, the Bank of Sweden and the Nobel Foundation have helped us to become one, to come close to realizing our scientific potential. Now in 1995 this great honour is given to an economist who maintains that central banks should focus exclusively on the control of inflation, that they must be resolute in resisting the temptation to pursue other objectives, no matter how worthwhile these objectives may be. It would be understandable if people at the Bank of Sweden were now thinking: “Why don’t we tell this man to take his theories to the Bundesbank, and see how many kronor he can get for them over there?”
But this is no occasion for ill-feeling. It is not the time to criticize central bankers or anyone else. When Voltaire was dying, in his eighties, a priest in attendance called upon him to renounce the devil. Voltaire considered his advice, but decided not to follow it. “This is no time,” he said, “to be making new enemies”. In this same spirit, I offer my thanks and good wishes to the Bank of Sweden, to the Nobel Committee, and to everyone involved in this wonderful occasion.