The “Lucas Critique” is Misesian at its core

posted by
August 31, 2016
Ludwig von Mises Institute
by Karl-Friedrich Israel  
Posted in Commentary

"Robert E. Lucas Jr. won the Nobel Memorial Prize in Economic Sciences in 1995 for one of the most celebrated contributions in modern macroeconomics: the Lucas Critique. His article on econometric policy evaluation, originally published in 1976, according to many leading economists sparked a genuine methodological revolution in macroeconomic analysis. He emphasized that the underlying coefficients of traditional econometric models are not constant. Hence, these models were inadequate for counterfactual policy evaluation. In other words, these models were inadequate for scientific predictions of the effects of political interventions into the economy, and thus incapable of prognostic comparison of alternative political interventions." (08/31/16)

https://mises.org/blog/lucas-critique-misesian-its-core  

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  • dL

    The Lucas critique is tied to rational expectations…you can’t forecast future effects of macroeconomic policy by relying on statistical relationships from past data. In effect, economic actors will immediately discount policy changes vis a vis macroeconomic variables.

    The Lucas critique/rational expectations came into the vogue in the 1970s due to stagflation breaking the traditional keynesian macroeconomic relationship between employment and inflation.

    Lucas is 3rd generational Chicago school. I’m not sure what that has to do with Mises or Hoppe. I used to subscribe to RE but it too has not withstood the empirical test.

    For example, everyone knows the financial markets/system is thoroughly rigged, but it keeps humming along. Either economic actors aren’t as independent as assumed by RE(i.e, the microeconomic foundation approach is incorrect…more like de Jasay’s firm) or the economic actors’ discounting methodology is biased to ride the wave and thus offers no predictive offset to policy. I.e, it reinforces macroeconomic policy.

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