The economist of rational expectations Nobel Prize winner: Robert E. Lucas showed how people anticipate policies.

October 12, 1995

AN ADVOCATE of intervention to assure competitiveness would demand breaking up the University of Chicago department of economics, much as they did the 1927 Yankees, to give others a chance. Chicago economists have won 21 percent of Nobel Prizes for Economics since the prize was instituted in 1969. That's eight in all, five of the ten given in the past six years.

Other economists have argued that attempts to regulate monetary or fiscal policies based on interventionist theories associated with John Maynard Keynes may not work. Robert E. Lucas Jr., awarded the Nobel Prize for Economics in 1995,

showed why.

Professor Lucas' contribution a generation ago was to show that individual workers, consumers, savers or corporations understand what policies are coming and act in their own interests accordingly, nullifying or changing the effect of the policy. He made "rational expectations" almost a school of economics, certainly a concern any economist takes into account in macro-economics, the study of the whole economy.

Where economics had become a series of pronouncements on what government should do, or avoid doing, Professor Lucas held that the economy cannot be fine-tuned. The humility is refreshing.

Yet policy must be made. Choices cannot wait. Policy-makers must judge or guess the effect of what they do, or fail to do. They can't avoid making assumptions.

Professor Lucas is now studying the connection between trade and growth. "We need to figure it out, and we haven't," he said. Nonetheless, governments must make trade policy as if they knew. They can't wait until Professor Lucas is satisfied with the ,, basis of their assumptions. But thanks to him, the assumptions are usually better based.

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