Robert E. Lucas, Jr. - Expensivity

Lucas’s Early Life and Education

Robert E. Lucas, Jr. (b. 1937), was born in Yakima, Washington.

Lucas’s parents ran an ice cream parlor in Yakima, but when the business failed, they moved to Seattle, where his father found work as a shipyard steamfitter. Later, Lucas senior found work as a welder and as a sales manager. Lucas’s mother worked as an artist for the fashion industry.

For his undergraduate work, Lucas attended the University of Chicago, where he received his bachelor’s degree in history in 1959.

After his bachelor’s degree, Lucas briefly studied in the doctoral program in economics at the University of California–Berkeley, before dropping out for financial reasons.

The following year, in 1960, Lucas was able to return to graduate school. This time, he decided to return to Chicago, where he obtained his PhD in economics in 1964.

Lucas’s dissertation was entitled “Substitution between Labor and Capital in U.S. Manufacturing: 1929–1958.” He has stated that he was a “quasi-Marxist” at the time.

Lucas’s Career

After taking his PhD, Lucas got his first job in 1964 at the Graduate School of Industrial Administration (now the Tepper School of Business) at Carnegie Mellon University.

Lucas taught at Carnegie-Mellon until 1974, when he returned to the University of Chicago. He taught at Chicago for the rest of his career.

Lucas is currently the John Dewey Distinguished Service Professor Emeritus in Economics and the College at the University of Chicago.

In 1995, Lucas was awarded the Nobel Memorial Prize in Economic Sciences. His Nobel lecture, entitled “Monetary Neutrality,” was published the following year in the Journal of Political Economy (see “Selected Works by Lucas” below).

Lucas’s Ideas

An eminent member of the Chicago school of economics, Lucas has been called “the most influential macroeconomist of the last quarter of the 20th century.”

The citation accompanying Lucas’s Nobel Prize summarized his main achievement as “having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeconomic analysis and deepened our understanding of economic policy.”

While most of Lucas’s work was quite technical, one of his ideas did capture the imagination of a wider audience in political economy, government, the world of non-governmental organizations (NGOs), and elsewhere, on account of its profound and far-reaching implications: namely, the so-called “Lucas paradox.”

The Lucas paradox is an empirical phenomenon that seems counterintuitive according to the central assumption of traditional economics that human beings are rational actors whose behavior can be explained through the concept of utility maximization.

The phenomenon in question is the well-established fact that capital does not naturally flow from developed countries to developing countries.

It seems that it ought to, because the lower ratio of capital to labor in the poorer country should translate into a higher rate of return on investment for the richer country’s investments there.

In other words, the law of diminishing returns for capital in the developed world should incentivize the flow of capital to the developing world.

In the real world, however, such capital flows do not spontaneously occur. This is the Lucas paradox, first articulated by the economist in his 1990 paper, published in the American Economic Review entitled “Why Doesn’t Capital Flow from Rich to Poor Countries?” (see below).

Explanations of the Lucas paradox vary, but in essence they boil down to various forms of risk involved in investing in the developing world—from a lack of infrastructure and missing factors of production to weak legal institutions, leading to such things as corruption (bribery), the unenforceability of contracts, and sovereign risk (the risk of nationalization of foreign assets).

Taken together, these risks simply outweigh the benefits deriving from the structurally inherent higher rate of return for capital invested in the developing world.

Selected Works by Lucas

1. Works Authored or Co-authored by Lucas

“Expectations and the Neutrality of Money,” Journal of Economic Theory, 4: 103–24 (1972).

Studies in Business-Cycle Theory (1981).

Models of Business Cycles (1987).

“On the Mechanics of Economic Development,” Journal of Monetary Economics, 22: 3–42 (1988).

Recursive Methods in Economic Dynamics, with Nancy L. Stokey and Edward C. Prescott (1989).

“Why Doesn’t Capital Flow from Rich to Poor Countries?,” American Economic Review, 80: 92–96 (1990).

“Nobel Lecture: Monetary Neutrality,” Journal of Political Economy, 104: 661–682 (1996).

Lectures on Economic Growth (2002).

“Life Earnings and Rural‐Urban Migration,” Journal of Political Economy, 112: S29–S59 (2004).

“The History and Future of Economic Growth,” in Brendan Miniter, ed., The 4% Solution: Unleashing the Economic Growth America Needs. New York: Crown Business (2012).

Collected Papers on Monetary Theory, edited by Max Gillman (2013).

“Knowledge Growth and the Allocation of Time,” with Benjamin Moll, Journal of Political Economy, 122: 1–51 (2014).

2. Book Co-edited by Lucas

Rational Expectations and Econometric Practice, with Thomas J. Sargent (two volumes) (1981).