Bob Lucas Strikes Back
After years of bashing the neoclassicals, the likes of Krugman and his followers finally saw critical assessments of macroeconomics and financial economics appear in The Economist two weeks ago, including a personal jab at Mr. Lucas himself, Fama and the efficient markets hypothesis, and arguably of the University of Chicago itself (or at least of certain "lakeside universities"). Now the grandfather of modern macroeconomics retaliates in the latest issue's Economics Focus.
In part, Lucas's rebuttal is very correct. Economic crises are usually unique events with unforeseeable causes, and it would be hard to imagine constructing testable scientific models to predict them. The most reliable approach is to figure out ways of coping with crises when they appear, and the Keynesian and neoclassical prescriptions being carried out by Congress and Ben Bernanke appear to be doing their job. Lucas falls a little short by failing to provide a paradigm for economic research as an alternative to Krugmanesque abandon-ship mentality toward modern macroeconomics. And it would have been nice for him to provide a little perspective on how we might be able to better understand financial and economic bubbles, if at all. But it is nice to see someone defending economics for a change.
Some critics, of course, like to observe that some economists DID predict the economic crisis accurately, and they therefore retort that Lucas's belief in the impossibility of predicting crises is merely HIS inability to predict crises. But this is simply an unscientific viewpoint. There will always be models and people that predict crises correctly by chance alone. Accurate prediction of a single crisis should not be a source of credibility. What is needed instead are robust models that make consistently correct predictions under a known set of circumstances. If the models of Krugman, DeLong, et al. do this, then so much the better for them.
In part, Lucas's rebuttal is very correct. Economic crises are usually unique events with unforeseeable causes, and it would be hard to imagine constructing testable scientific models to predict them. The most reliable approach is to figure out ways of coping with crises when they appear, and the Keynesian and neoclassical prescriptions being carried out by Congress and Ben Bernanke appear to be doing their job. Lucas falls a little short by failing to provide a paradigm for economic research as an alternative to Krugmanesque abandon-ship mentality toward modern macroeconomics. And it would have been nice for him to provide a little perspective on how we might be able to better understand financial and economic bubbles, if at all. But it is nice to see someone defending economics for a change.
Some critics, of course, like to observe that some economists DID predict the economic crisis accurately, and they therefore retort that Lucas's belief in the impossibility of predicting crises is merely HIS inability to predict crises. But this is simply an unscientific viewpoint. There will always be models and people that predict crises correctly by chance alone. Accurate prediction of a single crisis should not be a source of credibility. What is needed instead are robust models that make consistently correct predictions under a known set of circumstances. If the models of Krugman, DeLong, et al. do this, then so much the better for them.
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