Model Professor : University of Chicago’s Lucas Wins School’s 8th Economics Nobel

A University of Chicago professor won the 1995 Nobel Memorial Prize in Economic Science on Tuesday, the fifth time in six years and the eighth time overall that the campus, known for its free-market scholarship, has received the honor.

Robert E. Lucas Jr., 58, won the award for his influential theory on how the expectations of ordinary people can throw awry a nation’s finely tuned economic policies.

“He’s one of the two or three most prominent economists of his generation,” said Michael Boskin, a Stanford University economist and former chief White House economist in the George Bush Administration. “The only question was when he was going to win the prize--not whether.”

A thinker more drawn to quiet, scientific deliberations than punditry or politics, Lucas is credited with transforming basic assumptions of economists and policy-makers over the last quarter of a century. His work on “rational expectations theory” has fueled a continuing debate over the once-unquestioned role of the federal government in creating prosperity.

“Robert Lucas is the economist who has had the greatest influence on macroeconomic research since 1970,” the Royal Swedish Academy of Sciences said in its citation, noting that Lucas’ work has entered the “standard toolbox” of all economists.

The award of yet another economics Nobel to the University of Chicago, its eighth overall, was greeted Tuesday with a mixture of admiration and resignation at other campuses. Yet all agreed that Chicago has established an extraordinary record of achievement as the home to various conservative economists, most notably Milton Friedman.

Recent winners have distinguished themselves in studies of economic history, human capital and finance.

Lucas’ Nobel “confirms the enormously high standing of the University of Chicago,” said John M. Quigley, a professor and former chairman of UC Berkeley’s economics department. “That’s been confirmed time and time again.”

For all its complexity, Lucas’ work is distinctly grounded in the real world. According to his theory, people consider past experience and future expectations in their choices to spend or invest. The notion that consumers and businesses will adjust their actions to reflect changed government economic policies may seem intuitive, yet before Lucas, economists had insufficient methods for taking such changes into account.

The implications remain vast across a range of government policies: Lucas’ teachings, for example, suggest that average Americans, by rationally adjusting their behavior, can easily doom Federal Reserve Board policies aimed at stimulating the economy or cooling off inflation.

For example, if the Fed hikes interest rates to combat inflation, people might stop taking out loans, back away from major purchases and start a slump that ultimately forces the Fed to reduce interest rates.

“Models that we thought were guiding the fine-tuning of the economy through monetary and fiscal policy are more or less useless,” Lucas said Tuesday after winning the prize. “Those models presumed a lot of stupidity on the part of the ordinary citizen.”

While economists across the ideological spectrum saluted Lucas’ brilliance, they were not unanimous about its full implications for public policy.

For example, the notion that government policies may prove self-defeating in a world of rational expectations gives rise to the idea of “policy impotence,” in which the federal government is seen as virtually powerless to affect helpful, long-term change.

“He’s had a tremendous influence in the field,” said Robert Eisner, a professor of economics at Northwestern University. Eisner referred to Lucas as “a great economist,” but added: “I think the idea of policy impotence is quite foolish. Government can have a major impact on the economy.”

“He has made an outstanding contribution,” said Franco Modigliani, a Nobel laureate economist at the Massachusetts Institute of Technology who has also studied expectations. “I have no doubt that he is an excellent choice.”

But Modigliani continued, “I don’t always agree with the uses to which he pushes the conclusions.”

Some scholars suggested that the University of Chicago has hardly suffered from having a growing cadre of Nobel laureates who are in a position to make influential recommendations to the Swedish jury about future winners.

“I think there’s something about the Nobel process selection that tends to bring about a certain concentration from certain universities,” Eisner said, emphasizing that he was not trying to take any credit away from Lucas.

While some academics cautioned against generalizing too much about research at the University of Chicago, the Swedish academy Tuesday spotlighted Lucas’ intellectual link to Friedman, a previous winner from Chicago. Both scholars have argued forcefully that monetary policy--aimed at altering interest rates and the nation’s money supply--was an ineffective tool to increase employment over the long haul.

Certainly, Lucas’ refinement of rational expectations theory has given economists a great deal to think about in recent years, by providing a mathematical framework for exploring how consumers and businesses form their expectations about the economy.

Beyond that, Lucas has raised the level of skepticism about what people can realistically expect the government to do to stimulate a sagging economy or cool an inflationary one. This represents a direct challenge to the influential teachings of John Maynard Keynes--that public officials could accomplish much good by tinkering with economic policy.

One implication of Lucas’ work is that for government economic policies to have a chance at success, they must factor in the likely changes that such policies will have on public behavior.

In his 1994 book “Peddling Prosperity,” Stanford economist Paul Krugman credited Lucas with a powerful intellectual attack on the pro-government orthodoxy of Keynes, “so influential that it seemed as if Keynesian economics might be pushed into oblivion.”

Krugman concluded, however, that Lucas did not entirely demolish the view that government could play a constructive role in aiding prosperity.

Lucas has also been influential in challenging the type of computer models that were widely relied on by government and industry to simulate the outcome of various policy scenarios, such as changes in tax rates or interest rates. Before Lucas, however, such models paid little heed to the idea that consumers and firms could rationally adjust their behavior to changing policies.

“His work said, ‘Look, those models are all wrong.’ It was a brilliant attack on model building,” said Frank C. Wykoff, an economist at Pomona College.