| Interview with Robert E. Lucas Jr., Nobel Prize, Economics, 1995 by: Dr. E. C. Wit On Tuesday, October 7, 1997 at 410 Social Science Building The University of Chicago ECW: Your parents were admirers of president Roosevelt and the New Deal, and by implication of a Keynesian form of economics. You yourself have been educated by Keynesians. Is there any one particular academic or world-event that changed your perspective? Lucas: Economic theory has come a long long way since the 1930s and Keynesian models aren't economic theories in a modern sense, nor have they been developed further. What is the so-called Neo-Keynesians, who have some interesting ideas, are doing now is something different. But the main reason, I think, is that it has been so long since there has been a major depression. When I was in graduate school in the 50s the 30s hang over every aspect of social thought and the whole objective of good government was to prevent that from occurring again which is a damn good object. But we succeeded and our attention has shifted elsewhere and that is economic growth. That is the big story of the post-war period. ECW: So would you say that Keynesian economics is depression-economics? Lucas: Yes, that is what Pigs called it in his interview in 1936. ECW: You are considered the leader of Neo-classical thought and you are one of the main proponents of the Chicago School. How does the appreciation you and four of your colleagues received in the form of a Nobel Prize reflect today's world-economy. Lucas: I don't view it as political. Miller's theorem was not a political event. Fogel's work on railroads and American slavery was not political. Maybe my work on business was more political than any, because macro-economics is so explicitly connected to policy. But rational expectations that were considered conservative 20s, no-one views them that way today. Even neo-Keynesians are using rational expectation models. Everybody does. It is simply a reasonable axiom to impose on lots of economic models. ECW: But for instance, Gary Becker was involved with the Dole campaign last year. Don't you believe that was an outgrowth of his academic work? Lucas: Oh, sure. He wouldn't ask Gary to do it, if he hadn't been an eminent economist. If I would have been involved in last years election, I would have been on that side too. I voted for Dole too. [Lucas laughs] There are millions of conservatives in the world, but you don't get a Nobel Prize for being conservative. ECW: Let me focus the issue for a moment on the European, in particular, the Dutch situation. Prior to the Labour Victory in Britain, Holland has been involved in an governmental experiment in the form of an unlikely marriage between the labour party and the main right wing party. This would have been unthinkable 20 years ago, but now both left and right have discovered the market mechanism to solve social objectives. Lucas: ... Yeah, markets do a lot of things well and thorough going socialist system just doesn't function. We have learned a lot in that respect. But on the other hand, there are thing that markets don't do and that have to be done by someone else. There is a lot of talk about getting rid of the welfare state, which I think is basically dishonest. We are not going to get rid of the welfare state. We like the welfare state. We like many many aspects of it. We are not going to give it up. We are going to improve it. With we I mean my government, your government. Welfare reform is now part of the platform of the Democrats but they are not going to get rid of welfare. No-one wants to get rid off welfare. We are not going to let people starve or let children grow up without education, or houses, or clothing. ECW: In that sense you seem indeed much less "severe" than some of the orthodox economists. You have said once that neo-classical theory is to take one issue at a time. Lucas: That is when economics is at its best. Cost-benefit analysis we used to call it. If a government project has more benefits than costs then we are going to do it. It not just a general question whether government is good or bad. ECW: Ok, let's move on to some issues that do involve government intervention. The European governments are trying to implement a common coin, the Euro. What is your opinion about this? Lucas: Well, I think it is in general a good idea. It has certainly been a tremendous boom for the United States to have a single currency for this vast 350 million people. No-one in the US would seriously propose to go back to the state currencies. Having a single monetary policy, it should be well-conducted. To me the Europeans have come around under German leadership and I think everyone has come around the idea that monetary policy has to be on inflation and price-stability and should not fix up a whole variety of social ills on the basis of monetary policy. If they stick with that and have a common currency, it should be a great convenience. It is not a make or break thing but it is certainly a convenience. Some people say that labor mobility is the difference: The US have labor mobility, the Europeans don't. In the first place the Europeans have a lot more labor mobility than 20 years ago. But the point is if you don't have a lot of labor mobility, then you can't fix that up with individual monetary policies. Maybe you are sad that Europe doesn't have as much labor mobility as would be good, but it doesn't follow that you are going to oppose a monetary union because independent monetary policies can somehow make up for the disadvantages of immobile labour. You can't. I think the labor mobility issue although is talked a lot about is off the point. ECW: Some economists have proposed not to introduce a common currency, but instead make all currencies legal tender and let them compete with each other. What do you think of that idea? Lucas: In some sense that is nothing new. That is in a way the situation that you have now from a macro-economic point of view. Your country sticks to the German mark, but if the Bundes Bank should go into a inflationary policies, you might find it more useful to tag to the French frank. Still it doesn't give you the convenience of a single currency. You still have to change your coins if you go from Amsterdam to Frankfurt. It'd be more convenient if you had a single currency. Why not just to it right. ECW: So you suggest a strong central bank committed to price stability...? Lucas: Yes, that is right. ECW: I would like to put another issue before you. In Holland, the state is experimenting recently with privatization of the railroads. Do you believe that privatization of natural monopolies such as railroads and utility-plants is worthwhile? Lucas: I guess I wouldn't be willing to call rail-roads a natural monopoly, given the possibility of tracking, road-travel and even boats for shipping cargo. So there are a lot of alternative modes of transportation. So if I would make the argument for government engagement in rail- travel, it would be more of an externality argument. Everyone who takes a commuter train into Chicago, they relieve a bit of the traffic for those who drive in. Everybody who drives in imposes a cost on his fellow drivers by increasing traffic. So somehow that argues for taxing cars and subsidizing rails. So that's a good thing. For intra-city travel, the story is different. The US is too big. It is not a good way to travel from one city to another. Even if you are going to Detroit, flying is better than taking a train. But for commuter travel there is a good argument for government subsidies of train-travel, even though the company could be privatized to some extent. ECW: I would like to ask you a few question about issues related to the Nobel Prize. You received the Nobel Prize for Economics in 1995 for a great part for your work on Rational Expectations and their impact on economics. You have said that the theory of Rational Expectations makes clear that people cannot be fooled again and again by monetary actions of the state. Could you give an example in which this becomes clear? Lucas: The idea of fooling is not related to governmental policies in general. For instance, providing subsidies for train-travel doesn't fool anyone. It simply accounts for the externalities involved. Monetary policy on the other hand gives the illusion of prosperity. As income increases due to a inflationary policy of the central government, prices will go up too. The idea that you have more money to spend may have some real effects on behaviour, but those effects are transitory. Trying to manipulate behaviour through monetary policy has a dishonesty in it, which may seem to be a productive kind of dishonesty but in the long run, I think, is not. That is exactly why focusing on price stability period is good monetary policy. It gets around where there was a dishonesty. ECW: Do you believe, as you say, that rational expectation is a long run concept? Rather than having a perfect rational expectation, there is some learning involved. Lucas: I think that probability is a long run thing. If you toss one coin, what can you say? You may think that business cycles [i.e., another issue that Lucas has studied; it was mentioned in his Nobel Prize Award] is a short run thing, but they happen over and over again. So they are a recurrent event. If every time employment rates go up, the government responds to that by monetary expansion, then people learn that. For instance in Latin American countries, where people are so numbed by inflation rates that monetary expansion is no stimulus; nobody is fooled. If the Bundes Bank would start expanding right now, it would have an expansionary effect. Or if Greenspan would start doing it in the United States, it would work. These banks have built up a highly credible anti- inflation policy, that earned the confidence of the people. If they would turn the other way, we would be fooled for a while. ECW: Have you any names for us who might win the Nobel Prize in Economics this year? Lucas: I don't know. I could say that there are some people that I'd like to see winning. ECW: ... And who would that be? Lucas: Tom Sargent, who is intimately involved with the kind of work that I am doing. He is here in Chicago. ECW: What do you think are his odds. Lucas: I don't know. I have never been a good forecaster... ECW: So, no rational expectations there...? Isn't that in contradiction to your theory? [Lucas laughs] ECW: My last question: What has the Nobel Prize done for you? Lucas: It seems like it has done a lot. I live the same kind of life as I led before, but my work has some nice kind of recognition. It has taken care of my retirement worries...! [Lucas laughs] ECW: OK, thank you very much for this interview. | |
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