Lucas critique
Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT
Meaning
The Lucas critique was set out by Robert Lucas in 1976. It says that you cannot predict the effect of a new policy from relationships seen in past data. Those relationships depend on how people expected policy to behave. When policy changes, people change their expectations and their behaviour, so the old pattern breaks. The critique pushed economists to build models from how people form expectations and make choices.
Example
In the past data, more inflation went with less unemployment (the Phillips curve). When governments tried to use this link by deliberately raising inflation, people began to expect higher inflation. In the 1970s, high inflation and high unemployment came together (stagflation), and the old trade-off broke down.
Don't confuse with
- Goodhart's law (1975): once a number becomes a target, people game it, so it stops being a good measure. The Lucas critique is wider: any policy change can shift the behaviour that a model relies on.
Related concepts
- Monetarism
- Chicago school
- Cantillon effect
- Adaptive expectations
- Rational expectations
- Real business cycle theory
- Tinbergen rule
- Austrian school
- Economic calculation problem
- Supply-side economics