Considered the intellectual leader of the new classical school
of economic thought and of the rational expectations theory, Robert
Lucas, University of Chicago, has guest lectured across the United
States and in China, Finland, England, Israel and Canada.
Referred to as the economist's economist, Lucas has been influential in
setting the direction of economic research.
As editor of Journal of Political Economy, he oversees one of
the most prestigious economics publications in the world... and plays
a fair second base, too.
Region: In a recent paper, you advocated cutting the capital income
tax to zero. In fact, you asserted that such a change in our tax policy
would be "the largest genuinely free lunch I have seen in 25 years in
this business." Could you explain why this would be such a good policy?
Lucas: Taxing capital involves taxing income twice: once
when you receive it, before you save it, and then once again when
you get the return on the savings. It gives a bias toward consuming
now rather than consuming later and depresses capital accumulation.
Many people have estimated, and this is not an original remark
or observation of mine, that the U.S. capital stock could be 30,
40, 50 percent higher than it is now under a tax structure that
doesn't penalize capital accumulation with this double taxation.
It's an important issue.
Region: In another of your recent articles, "Making a
Miracle," you surveyed current models of growth and trade and
concluded that economic growth is closely related to on-the-job
accumulation of human capital. What if any implications does this
result have for the type of growth-oriented policies that the
Clinton administration is trying to design?
Lucas: None, I would say. It would be a big mistake for
the Clinton administration to imagine that it can pick the industries
that offer high returns on-the-job accumulation of human capital.
Region: Some programs, like Head Start, are on-the-job
training for kids. Are they pointed in the right direction?
Lucas: I'd just call Head Start "schooling," not "on-the-job
training." There's a lot of controversy as to how effective the
program is. Apparently it has some short-term effects: Kids who've
been through the Head Start program have a lot better first grade
than kids who haven't. But by the time they're ready for high
school it's hard to tell the difference between those who've had
the program and those who haven't. The crucial issue with Head
Start is whether the effects of the program accumulate over time
or decay over time.
Region: You've been a strong advocate of the quantity theory
of money. And as a guide to monetary policy, however, it has been
less than satisfactory. The Federal Reserve is having trouble finding
a monetary aggregate target that has stood the test of time. We
first abandoned M1 for M2; now we're not too happy with M2.
Is the Fed just using the wrong monetary aggregate or are we
using the wrong theory?
Lucas: I'm not sure which monetary policy one wants a guide
for. There's no monetary aggregate that's going to be adequate
for some kind of short-run fine tuning of the economy, for stabilizing
the inflation rate on a quarter-to-quarter basis. If you're interested
in long-run price stability, which is what I think the Fed should
be interested in, then M1 has stood the test of time. So has the
monetary base. There is a wide choice of aggregates. It depends
on how demanding you are. From my own perspective, I don't expect
much from monetary policy and I don't find it hard to find an
aggregate that is adequate for practical purposes.
Region: So there's not another aggregate that we should
be keying on?
Lucas: There might be. The quantity of money in a modern
economy is a mix of a lot of different things, from hand-to-hand
currency to demand deposits to other kinds of deposits. People
have proposed a lot of different ways of adding up or averaging
these various components, and there may well be a better way to
do it than we've discovered so far.
Region: What subjects do you think are on the economics
frontier in the 1990s?
Lucas: In economic policy, the frontier never changes.
The issue is always mercantilism and government intervention vs.
laissez faire and free markets. And that's exactly what's on the
frontier right now with the new administration. How mercantilist
are they going to be? We don't know.
The research frontier? That's too hard a question. If I knew
the answer, I'd be doing it.
Region: I read that you started your academic career
as a historian but switched to economics. Why?
Lucas: I was a history undergraduate and began graduate
work in history at Berkeley. I was there for a semester and took
pretty much all graduate courses in economic history. I realized
that I didn't know enough economics to do it, so I started sitting
in on some economics courses. I was caught by surprise at the
technical nature of economics, and realized I couldn't sort of
pick it up on the side, so l moved here and entered the economics
department. I suppose I thought I was going to get back into economic
history, but one thing led to another.
Region: Who were the main influences on you at Chicago?
Lucas: Milton Friedman's courses were the major event
in graduate study here. I didn't work with Friedman on my thesis,
but his price theory courses were tremendously exciting. They
changed my whole way of looking at economics and social science.
I wrote my thesis with Arnold Harberger and I worked with a lot
of other people. Zvi Griliches and Donald Bear were two of my
favorite teachers. Dale Jorgenson visited here, and was very helpful
to me. H. G. Lewis, a labor economist in Chicago, was a tremendous
help to me as well.
Region: As you studied macroeconomics the Keynesian model
must have been pervasive.
Lucas: I took macroeconomics from Martin Bailey, Carl
Christ and Harry Johnson. It was basically all Keynesian models.
Region: But later you became a central figure of the
new classical thinkers and a standing critic of the Keynesian
doctrine, calling it poor economics. That's quite a transformation.
Lucas: I guess so, but no one ever thought Keynesian
economics was good economics. From the start, at least in the
United States, there was an effort to unify Keynesian economics
with neoclassical economics. Paul Samuelson really started that,
or maybe Franco Modigliani. So even Keynesians were unhappy with
Keynesian economics. There was an effort that everyone was engaged
in to provide a microeconomic foundation for Keynesian models.
Thinking that was a desirable thing to do was not the same as
opposing Keynesian economics. Everyone believed in it.
It just seems that as we got further and further toward finding
something that looked like it might be a microeconomic foundation,
it got less and less Keynesian. Finally some of us decided it
wasn't Keynesian at all, and that was that.
Region: But your battle against Keynesian ideas is almost
an intellectual passion. Is that correct?
Lucas: Oh I don't know. I used to feel embattled. I felt
that [Thomas] Sargent and I and Neil Wallace and other people
were getting a lot of misguided criticism back in the `70s, and
we hit back. Those days seem a long time in the past.
A new set of ideas that people have labeled Keynesian economics
has arisen in the last 10 years, but it doesn't have any real
connection with the old. These ideas haven't had much influence,
and it is hard to feel much passion about them, for or against.
Region: Referring to President Clinton's economic conference, New York Times reporter Sylvia Nasar said. "After
20 hours of talk in Little Rock, Ark., last week about the economy,
the intriguing question is "what wasn't said?" From your perspective,
what wasn't said?
Lucas: I didn't read the accounts of that get-together.
It was basically a Democratic Party victory celebration, and I
wasn't hurt that I wasn't invited. It didn't pretend to be a balanced
or across-the-board sampling of the economics profession. My view
is that the recession is kind of over, and anti-recession policy
should be far from the top of the agenda of the new administration.
The recession was a campaign issue, and numbers that came out
after the election showed that the recovery was already going
full steam ahead in the third quarter. It's time to move on to
Region: This question may relate to what you were saying
just a minute ago about the old Keynesian ideas and the new Keynesians.
Have the neo-Keynesians once again stormed the castle in Washington?
Lucas: It's hard for me to say. What troubles me about
neo-Keynesians is not so much that they have a definite clear-cut
ideology that I dislike, but that they have too little ideology.
They're too good at rationalizing anything. So if I'm worried
about anything, it's that economics as a kind of independent force
won't really be operating in this administration. These guys have
enough talent to put a kind of semi-respectable economic rationale
on whatever the hell the politicians come up with. I don't see
a neo-Keynesian agenda on policy issues.
Region: In your academic career, unlike many of your
colleagues, it seems you have seldom played the role of the day-to-day
activist and have disdained the notion of fine tuning. Is that
Lucas: I am an opponent of fine-tuning, but I certainly
do not look on economic advising with disdain. It is an important
task, and those who do it with honesty and skill perform a real
It's also important for some economists to function as independent
critics, outside of government.
I have done very little advising myself, but that doesn't differentiate
me from most of my colleagues. Most economists are not waiting
for a call from Washington. It just isn't what most of them spend
their time doing, even in a policy-oriented area like macroeconomics.
Most of us spend time on basic research and will be pleased if
our ideas contribute something 10, 15, 20 years down the road.
Region: People often refer to the "Chicago School" and
its enormous influence. From your perspective, what is the Chicago
School and what has it come to in 1993? Is it vigorous? Has it
Lucas: This department is extremely vigorous right now.
There is a tremendous group of people here in their 40s, already
recognized as the leaders of their cohorts, who are going to carry
on the tradition. So in terms of standing, I think this department
is as strong as it's ever been. Whether we still want to call
it the Chicago School, it's hard to say. No one would describe
the younger faculty here as "followers" of Becker, Rosen and me,
but I don't know if we could be described as followers of people
like Milton Friedman and George Stigler, or they of Frank Knight
and Jacob Viner.
It seems to me the common factor all of these generations share
is the focus on basic science, as opposed to a focus on the immediate
influence in the current political scene. This can make our writing
and speaking look irrelevant or utopian but which as time passes,
you can find yourself in the mainstream without changing a thing.
Region: The Chicago School was known for its orientation
toward free market thinking. Is that still part of the Chicago
School? Is that the essence of it?
Lucas: I would have a hard time taking a given political
issue going down the list of my colleagues and predicting who
stands where on any given issue. It's not that political a group
and a lot of people, particularly younger people, haven't really
written or spoken much on political issues.
With that said, I guess Chicago has a pro market bias or maybe
a better way to put it is just a skepticism about the efficacy
of government programs. The beauty of neoclassical economics is
that it's not a revolutionary all-or-nothing kind of thing. It
s a reformist line of thought so that you really have to take
issues one at a time. I think most people here would agree that,
for example, medical insurance in the United States is in bad
shape and needs attention and they respect the fact that the new
administration is facing up to that. Whether or not they're going
to face up to it in a way that I like or some of my colleagues
like, we'll have to wait and see. You've really got to take it
issue by issue.
Region: Turning to a more personal question, I learned
that you were a pretty good shortstop at one point.
Lucas: I played second base. I didn't have the arm for
short. We had a slow-pitch softball team at the business school
at Carnegie, and I played there. In Chicago we play softball with
these 16-inch softballs, which are so big you can't use a glove
and you have to throw them kind of like a football. And you gotta
weigh 280 lbs. to hit the damn thing anywhere. So my career ended
when I moved here in 1974.
Region: Are you a baseball spectator? Do you follow the
Lucas: Yeah. A little bit. Go to one or two games a year.
Region: And one of the other things that I learned about
you is that you've quite well read outside of the world of economics.
Lucas: I read a lot of contemporary fiction. Some history
and some theology. Anything that looks interesting.
Region: To close the interview, is there something we
haven't touched upon that you would like to add?
Lucas: The Minneapolis Fed has really quite a remarkable,
unique role in macroeconomics in the last 20 years that your readers
should know about. I guess it was started with John Karaken and
Neil Wallace when they joined the Research Department, and there's
just been a tremendous stream of outstanding people through, some
of whom are connected with the University of Minnesota, some of
whom are not. The Minneapolis Fed has become an exciting place
for younger people to spend time, a place where you can learn
a lot. Ed Prescott's been an incredible addition to the place.
Region: Remarkable enough that it's affected mainstream
Lucas: Certainly, I guess what's impressive about the
place is that the presidents of the bank have supported this group
and continue to let its members follow their own noses. There's
really been nothing like it in the Federal Reserve System. It's
converted me to the virtues of having 12 regional banks, which
I had always thought of as just a political concession at the
time the Federal Reserve System was founded. But the fact is that,
at least in research, it's led to a tremendous amount of diversity,
and more and more banks are following the Minneapolis model and
supporting basic research.
Region: Thank you Mr. Lucas.
More about Robert Lucas
John Dewey Distinguished Service Professor of Economics,
University of Chicago
Editor, Journal of Political Economy
Member, National Academy of Science
Fellow, National Academy of Arts and Sciences
Doctorat Honoris Causa, Universite Pari-Dauphine
"Making a Miracle," Econometrica, March 1993.
"Efficient Unemployment Insurance" (with Andrew Atkeson).
Working paper, 1992.
"Supply Side Economics: An Analytical Review," Oxford
Economic Papers, 41 (1990): 293316.
Recursive Methods in Economic Dynamics (with
Nancy L. Stokey and Edward C. Prescott). Cambridge: Harvard
University Press, 1989.
More Biography Information
Nobel Prize biography [off-site]