Robert Lucas was a giant of macroeconomics The Economist

 The discipline, willingly or not, has inhaled his influence

When he presented an early version, a young economist despaired: “You just explained why everything I’ve done in the last few years is worthless.”

 Economists, he believed, “are basically storytellers, creators of make-believe economic systems”. So he and his colleagues built a fantastical new world for wonks to explore.

Lucas adopted the “rational expectations hypothesis”. He assumed the actors in his models would expect what the model itself predicted. If an economist can foresee that extra tokens will raise ride prices, then operators should expect the same.

With the assumption of rational expectations, Lucas felt he had “eliminated the main intellectual basis” for fiscal and monetary fine-tuning of demand. After all, cashiers could not systematically fool ride operators. “Keynesian economics is dead,” he reported in 1979. 

That report proved exaggerated. 

The Economist 18 May 2023

Five years before the financial meltdown of 2008, Robert Lucas famously declared that “the central problem of depression-prevention has been solved . . . and it has been for many decades”.

Lucas, whose Chicago School housed the high priesthood of mathiness, won a Nobel Prize for his rational expectations theory. It demonstrated that the market was always right.

Edward Luce FT 9 October 2019

- There is no such thing as rational expectations.

There is wishful thinking, or panic.

Rolf Englund, many years ago (probably in 1997)


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