What is the Lucas Critique?

The Lucas Critique is in economics a criticism of Keynesian models.    In the 1970s, Keynesian models didn’t work.  We had high inflation and high unemployment contrary to the understanding of their predictions.

Lucas found the flaw.  Ah ha.   Lucas said look, the Keynesian models practically make up their prediction at the end.  What we should do is derive the prediction from a model of human behavior.

You are probably thinking Lucas said we should start with how people actually behave in order to derive predictions of how the economy actually behaves.

Nooooooo!

Lucas didn’t say that.  You can’t win a Nobel Prize in economics for saying that.

No, Lucas said we should start with a model not of how people actually behave, but how they don’t behave.   That is genius in economics.  Based on the model of how people don’t behave, but should in Lucas’s view perhaps, we would derive a model of how the economy should behave.  And that model, Lucas claimed would work.  Lucas was himself never able to offer such a model.  But he won the Nobel Prize in economics anyhow.

Not only that, economists consider this the most deserved Nobel Prize in the last 25 years.  Pretty good huh.

Lucas comes up with a reason for Keynesian models not working, which actually has nothing to do with them if you get right down to it, and proposes no model of his own, and his proposal isn’t actually that great anyhow, and he wins the Nobel Prize.  Only in Chicago.

 

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About New Math Done Right

Author of Pre-Algebra New Math Done Right Peano Axioms. A below college level self study book on the Peano Axioms and proofs of the associative and commutative laws of addition. President of Mathematical Finance Company. Provides economic scenario generators to financial institutions.
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