SYLVIE DOUGLIS, BYLINE: NPR.
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DARIAN WOODS, HOST:
The world of economics lost a major force this week. Robert Lucas died on Monday, aged 85. We called his one-time colleague, a senior fellow at the Hoover Institution, John Cochrane.
JOHN COCHRANE: He really was a giant in the field. I think he's not so well-known outside economics. But a lot of us would put him as the most influential economist of the 20th century. When you look at what economists do now, it's Lucas, Lucas, Lucas (laughter).
ADRIAN MA, HOST:
A lot of what economists do is build models of the world, these mathematical representations of how people or companies might respond to change. So if you cut taxes, what might happen to inflation or economic growth? These models are super important. Just think about the debate today over how much the Federal Reserve should be raising interest rates to try and control inflation. Like, how high is too high before you cause a recession?
WOODS: But in the 1970s, Robert Lucas argued the economic models trying to answer those kinds of questions were too simplistic. He challenged economists to think harder. And that changed the discipline forever.
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WOODS: This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.
MA: And I'm Adrian Ma. While many economists see Robert Lucas as one of the most influential in their field, he's not exactly a household name. So today on the show, we try to change that.
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WOODS: Robert Lucas was one of the most important economists over the last 50 years. Born in Yakima, Wash., he went on scholarship to the University of Chicago. He later won a Nobel Prize. He made economic forecasts better. And according to John Cochrane, he was also a great colleague.
COCHRANE: I showed up as a assistant professor in the University of Chicago fresh out of Berkeley, didn't know much about anything (laughter). And Bob treated me, a brash, young assistant professor who didn't know much of anything, like a full colleague, gave me all sorts of comments on my papers and expected me to comment on his papers. A truly great guy. Also, he could be grumpy (laughter)...
MA: Right.
COCHRANE: Grumpy in a polite way, never personal. But he could be grumpy about, you know, too much airy-fairy, talky-talky stuff not grounded in thinking seriously.
MA: Yeah. And Robert Lucas was just as critical of bad economic models, those equations that spit out how an economy might respond to changes. And one of his big contributions can be understood by going back to the high inflation period of the 1970s. Back then, economists talked about this inverse relationship between inflation and unemployment, a thing called the Phillips Curve. And the idea is that when inflation is low, unemployment tends to be high. And when inflation is high, unemployment tends to be low. So that is kind of similar to what we have now. Prices have been rising faster than we'd like, but unemployment is very low. There are tons of jobs out there.
WOODS: What was different then was that some economists and policymakers were arguing that inflation was the lesser of two evils.
COCHRANE: Those economists quickly decided that wasn't just a correlation, that was something exploitable. Let's have a little more inflation, and we could really beat down unemployment.
MA: As in, sure, we could keep prices rising because it's better to keep people in jobs. Maybe the central bank should keep interest rates low and help people borrow. Or maybe the government should just keep borrowing and spending.
COCHRANE: Bob Lucas really kicked it out of the park to understand that this correlation wouldn't last once you tried to exploit it, that it was just a correlation. So you know, rich guys drive BMWs. That doesn't mean giving everyone a BMW is going to make us all rich, right?
MA: That doesn't mean I would say no to a BMW if I was offered.
WOODS: (Laughter) Me either. But, you know, Robert's argument was that if the government is, say, borrowing and borrowing and borrowing and buying everyone BMWs, companies and workers will learn to expect that. They'll think, we've got a government that is pumping a lot of money into the economy. And so inflation is likely to stay a problem. So I'm going to anticipate this. I'm just going to raise my prices now. Or I'm going to ask for a raise now. And that behavior in itself is going to make inflation grow higher and higher.
MA: Right. So Robert Lucas was saying that those other economists were missing something. They were missing that people respond to changes of the rules of the game. They get higher inflation expectations. And at some point, what might have worked in the past stops working.
WOODS: Yeah, so you can end up with high inflation and high unemployment, the worst of both possible worlds. Here's Robert Lucas on NPR in 1996, talking about his findings.
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ROBERT LUCAS: There's less of a need for government to play a role as an active stabilizer of an unstable system. We've come to the realization that the government is less able to do that than we once thought, and also that the need for government to do that is much smaller than we once thought.
MA: Robert Lucas was part of a school of thought that was generally skeptical of too much government intervention. But what's really powerful about Robert Lucas' insights is that it can be applied anywhere, not just to inflation. Anytime you're thinking about a new policy, economists have to answer this question - how would people respond? And simply saying, well, based on history, they're going to respond this way, that's not good enough. Economists call this the Lucas critique.
WOODS: Ben Moll is a professor at the London School of Economics and has collaborated with Robert Lucas.
BEN MOLL: You know, that Lucas critique logic is much, much deeper and applies to lots of other things. And that's really the thing that shifted, you know, macroeconomics research.
WOODS: Essentially, the Lucas critique pointed out that the economy isn't a chessboard where you can just shift the pieces around with a formula. Your opponent will probably figure it out and change how they play. And in fact, Ben takes the principle one step even further.
MOLL: And it's really, like, you know, something that doesn't just apply to economics. It applies to lots of things in life once you start thinking about it.
MA: OK. So for example, let's say I have a cup of coffee every morning before I go to the office because it wires me up and makes me more productive. And then my boss gets an idea. He says, you know what? Adrian gets more productive when he drinks coffee. Let's give him free coffee at the office. That way he'll drink even more coffee and be even more productive. But here's where I change my behavior, because I see there's going to be free coffee at the office. I just stop making coffee at home. I drink it at the office. And the net result is I end up drinking the same amount of Joe and am not really any more productive like my boss was hoping for. This, in essence, is the Lucas critique. And Robert Lucas didn't just leave the world with one groundbreaking theory. He kept working, investigating how investment decisions get made, how cities grow and how lower-income countries become richer.
WOODS: His contributions to the field of economics were clear on social media this week. So we called up a few economists who knew him. And we asked them, what was one thing Robert Lucas taught them?
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ESTEBAN ROSSI-HANSBERG: My name is Esteban Rossi-Hansberg. And one thing that Bob Lucas taught me is to use common sense to understand the economy. But at the same time, always be rigorous about the work.
ROSSI-HANSBERG: My name is Shruti Rajagopalan. And one thing that Bob Lucas has taught me is that once you start to think about economic growth, it is hard to think about anything else.
GUSTAVO GONZALEZ: Gustavo Gonzalez. And one thing that Robert Lucas taught me was how to elaborate theory based on facts.
MOLL: I'm Ben Moll. I'm a professor of economics at the London School of Economics and a former Bob Lucas student. The thing with the most lasting impact was just the art of succinct but beautiful writing in economics.
WOODS: We asked his close colleague John Cochrane as well.
COCHRANE: He set the standard for what a colleague should be, you know? I'm a rough assistant professor, and he wrote comments on my papers and showed up at my workshops and came up afterwards and helped me, you know, and treated me as a total equal - and how he helped his students. So I think I'll list that as my No. 1.
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MA: This show was produced by senior producer Viet Le and engineered by Ko Takasugi-Czernowin. It was fact-checked by Sierra Juarez. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.
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