Robert Lucas’ umbrella16 August, 2016 at 13:03 | Posted in Economics | 2 Comments
To understand New Classical thinking about this crucial issue, consider Lucas’s response to the following question: If people know the true distribution of future outcomes, why are autocorrelated mistakes such a common occurrence?
“If you were studying the demand for umbrellas as an economist, you’d get rainfall data by cities, and you wouldn’t hesitate for two seconds to assume that everyone living in London knows how much it rains there. That would be assumption number one. And no one would argue with you either. [But] in macroeconomics, people argue about things like that. (In Klamer 1983, p. 43)”
What Lucas clearly has in mind is a model in which the distribution of outcomes (like the distribution of rainfall in London) is pregiven and independent of agent decisions (about whether or not to carry umbrellas) and agent errors. Future equilibrium states exist prior to and independent of the agent choice process that is supposed to generate them.
Conclusion: umbrellas are not economies. And I guess most people — at least outside The University of Chicago Department of Economics — knows that …