Robert Lucas’ umbrella

16 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?

Umbrella_large“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.

James Crotty

Conclusion: umbrellas are not economies. And I guess most people — at least outside The University of Chicago Department of Economics — knows that …

2 Comments »

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  1. The economy is not like the weather in that rain is not caused by the purchase of umbrellas. But, I am not sure that is as widely appreciated as it should be.

  2. Once again the confusion between micro- and macro-. We should be concerned with Macro- or the average rainfall, in these terms.

    The rain it raineth every day
    on the just and on the unjust fella.
    But it raineth hardest on the just,
    ’cause the unjust’s got his umbrella!


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