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Remembering the man who busted the inflation-employment myth

LEILA FADEL, HOST:

The world of economics lost a major force this week. Nobel Prize-winning economist Robert Lucas died on Monday. He was 85. Our colleagues Darian Woods and Adrian Ma of the Indicator from Planet Money podcast explain how Lucas changed the field of macroeconomics.

DARIAN WOODS, BYLINE: Robert Lucas was one of the most important economists over the last 50 years. Born in Yakima, Wash., he went on scholarship to the University of Chicago. We called his one-time colleague, a senior fellow at the Hoover Institution, John Cochrane.

JOHN COCHRANE: He really was a giant in the field. I think he's not so well-known outside economics. But a lot of us would put him as the most influential economist of the 20th century. When you look at what economists do now, it's Lucas, Lucas, Lucas (laughter).

WOODS: And according to John Cochrane, he was also a great colleague.

COCHRANE: I showed up as a assistant professor in the University of Chicago fresh out of Berkeley, didn't know much about anything (laughter). And Bob treated me, a brash, young assistant professor who didn't know much of anything, like a full colleague.

ADRIAN MA, BYLINE: One of his big contributions can be understood by going back to the high inflation period of the 1970s. Back then, economists talked about this inverse relationship between inflation and unemployment. And the idea is that when inflation is low, unemployment tends to be high. And when inflation is high, unemployment tends to be low. So that is kind of similar to what we have now. Prices have been rising faster than we'd like, but unemployment is very low. There are tons of jobs out there.

WOODS: What was different then was that some economists and policymakers were arguing that inflation was the lesser of two evils.

COCHRANE: Those economists quickly decided that wasn't just a correlation, that was something exploitable. Let's have a little more inflation, and we could really beat down unemployment. Bob Lucas really kicked it out of the park to understand that this correlation wouldn't last once you tried to exploit it, that it was just a correlation. So you know, rich guys drive BMWs. That doesn't mean giving everyone a BMW is going to make us all rich, right?

MA: Robert Lucas was saying that those other economists were missing something. They were missing that people respond to changes of the rules of the game. And at some point, what might have worked in the past stops working.

WOODS: Yeah, so you can end up with high inflation and high unemployment, the worst of both possible worlds. Here's Robert Lucas on NPR in 1996, talking about his findings.

(SOUNDBITE OF ARCHIVED NPR BROADCAST

ROBERT LUCAS: There's less of a need for government to play a role as an active stabilizer of an unstable system. We've come to the realization that the government is less able to do that than we once thought.

MA: What's really powerful about Robert Lucas' insights is that it can be applied anywhere, not just to inflation. Anytime you're thinking about a new policy, economists have to answer this question - how would people respond? And simply saying, well, based on history, they're going to respond this way, that's not good enough. Economists call this the Lucas critique.

WOODS: Essentially, the Lucas critique pointed out that the economy isn't a chessboard where you can just shift the pieces around with a formula. Your opponent will probably figure it out and change how they play.

MA: Adrian Ma.

WOODS: Darian Woods, NPR News.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

Darian Woods is a reporter and producer for The Indicator from Planet Money. He blends economics, journalism, and an ear for audio to tell stories that explain the global economy. He's reported on the time the world got together and solved a climate crisis, vaccine intellectual property explained through cake baking, and how Kit Kat bars reveal hidden economic forces.
Adrian Ma
Adrian Ma covers work, money and other "business-ish" for NPR's daily economics podcast The Indicator from Planet Money.