Home > depression, Keynes, The Economics Profession > Robert Lucas on the slump

Robert Lucas on the slump

from Lars Syll

In a recent lecture on the US recession – Robert Lucas gave an outline of what the New Classical school of macroeconomics today thinks on the latest downturn in the US economy and its future prospects.

Lucas starts by showing that real US GDP has grown at an average yearly rate of 3 per cent since 1870, with one big dip during the Depression of the 1930s and a big – but smaller – dip in the recent recession.

After stating his view that the US recession that started in 2008 was basically caused by a run for liquidity, Lucas then goes on to discuss the prospect of recovery, maintaining that past experience would suggest an “automatic” recovery, if the free market system is left to repair itself to equilibrium unimpeded by social welfare activities of the government.

As could be expected there is no room for any Keynesian type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. No, as usual in the New Classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply side policies.

Lucas is convinced that what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector. But – if left to run its course unimpeded by European type welfare state activities -the free market will fix it all.

In a rather cavalier manner – without a hint of argument or presentation of empirical facts – Lucas dismisses even the possibility of a shortfall of demand. For someone who already 30 years ago proclaimed Keynesianism dead – “people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another” – this is of course only what could be expected. Demand considerations are simply ruled out on whimsical theoretical-ideological grounds, much like we have seen other neo-liberal economists do over and over again in their attempts to explain away the fact that the latest economic crises shows how the markets have failed to deliver. If there is a problem with the economy, the true cause has to be government.

While Greg Mankiw’s – one of the leading “New Keynesians” – only comment to this was a rather uninformative “I don’t always agree with Lucas, but I almost always find him thoughtful and thought-provoking,” Paul Krugman’s comment was more adroit:

[A]s is obvious to everyone but the hermetic inhabitants of the freshwater world, the attempt to explain business cycles in terms of rational expectations and frictionless markets has failed; and Keynesian economics continues to be very useful. But to concede that, to even consider the possibility that we’re in a demand-shortfall slump of the kind Keynes diagnosed, would be an incredible comedown for Lucas.

My rational expectation is that 30 years from now, no one will know who Robert Lucas was. John Maynard Keynes, on the other hand, will still be known as one of the masters of economics.

  1. February 19, 2013 at 11:24 am

    Both rational expectation (Robert Lucas) and government demand management (John Maynard Keynes) are wrong. Just open your eyes to the blindingly obvious evidence! All snake-oil.

  2. sergio
    February 19, 2013 at 11:46 am

    “free market system is left to repair itself to equilibrium”, ” -the free market will fix it all”
    They keep saying this complete nonsense and people keep believing them because they were not prosecuted as criminals for destructive “free market” policies around the world.
    It is not enough to say that they are wrong or naive or childish or crazy.
    No one was prosecuted for “shock therapy”, for lehman-shock, for euro collapse. That is why they are keep saying nonsense.

  3. BFWR
    February 19, 2013 at 3:20 pm

    The onerous effects of the current crisis have been mitigated somewhat by the social safety net created after the last depression, and the reason that the Financial powers have been able to put off Rooseveltian jobs programs etc. (which are not true economic solutions either) is because of that same safety net. The answer is neither Neo-classical nor Keynesian orthodoxy. Neo-classical is nothing more than naked market worship, and Keynesianism was a bastardization reform effort of what could have been a true transformation of the consumer financial paradigm, the elimination of the greater part of the re-distributive taxation system and a change in the actual intent of the economic, financial and monetary systems from the will to power of the current powers to the will to freedom for the individual. And that transformative movement was the insurgent Social Credit movement that was disrupted by WW II, and ever since falsely maligned by self interested Financial powers and their paid cadre of economists.

    Man will stumble forever unless he elevates the current ideas and intentions of his systems from the inadequate, onerous and inhumane to the universal, freeing and Wise. Economic “wisdom” is an oxymoron. Actual human wisdom, which is a higher level order of thinking (philosophy) and acting (policy) is what is required.

  4. Russell
    February 19, 2013 at 4:11 pm

    Whether FreshWater or SaltWater, surely mainstream economists both ignore the real limiting factor on growth: natural resources?


    30 years from now, maybe no-one will be talking about Keynes either, but instead asking why we didn’t listen to Soddy, Georgescu-Roegen or Daly.

  5. BFWR
    February 19, 2013 at 6:36 pm

    The only way we will be able to move toward steady state efficiency is to evolve the philosophical basis for our systems. That in turn will truly unleash technology which is our best if not assured hope.

  6. February 20, 2013 at 12:49 am

    Free markets are not-free-for-all; they require governments to enforce the law on property rights, fair trading etc. Governments have the power and responsibility to play their part. But they haven’t:

  7. Steve
    February 20, 2013 at 2:30 am

    What if there is an unperceived systemic flaw in classic free market theory itself? That possibility would obviously be worth investigating, right? And I’m not referring to any of the classical Marxist critiques. I’m referring to the idea that a factor that is considered normal and not problematic may actually inhibit the free flowingness of free market theory.

    • sergio
      February 26, 2013 at 2:56 pm

      Well, that flaw is well-known and does not need to be investigated. Whole huge neoclassical economics is founded on this very little flaw. And if you remove that flaw whole neoclassical economics would turn into rubbish, dust. That is why they interested to hide this flaw and not to expose it. So what it is exactly that flaw?
      This flaw is very simple – free market is utopia. It does not exist in reality. It exists only in the minds of neoclassical economists. It is their illusion. So, every of countless neoclassical theories is flawed since it describes utopia.

  8. February 21, 2013 at 6:14 pm

    “My rational expectation is that 30 years from now, no one will know who Robert Lucas was.”

    I knew that I would eventually come to appreciate the deep insights of rational expectations.

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