Robert Lucas is the most outstanding economic theorist of the late 20th century. He was instrumental in taking the economics profession away from Keynesian economics, especially Keynesian policy, with his sharp analytical work in the 1970s. In the space of about three articles, he changed the way economists did macro-economics: a revolution that became known as new classical economics. He won the 1995 Nobel prize for this work.
But Lucas has not rested on his laurels. When he was asked to give the Marshall lectures in Cambridge, his audience expected him to go over the old ground of the 1970s and defend the rational expectations argument. Instead his lecture was "On the mechanics of economic development". Those lectures, first published in 1988, are reproduced in this book. Along with Paul Romer, who studied with him at Chicago, Lucas launched what Gordon Brown later called non-neoclassical endogenous growth theory. That has defined the debate on development for the past 15 years. It emphasises the crucial importance of investment in education and health for economic betterment.
Lucas keeps moving on because he is genuinely interested in tackling problems of unemployment, growth and poverty. But he does so not in the fashion of radical political economy that is more rhetoric than sense, but by rigorous theorising. He takes economic theory seriously in tackling these questions and gets much farther than most. Thus his answer to the 1970s crisis of Keynesianism was to propose a better theory of employment determination. Three other essays in this book ask the question why capital does not flow from the rich to the poor countries; what explains the Asian miracle; and what are the prospects for growth in the 21st century?
Good as these four pieces are, the real gem is the last item: Lucas's Kuznets lectures given in 1999 at Yale University, titled "The industrial revolution: past and future". They provide a lean version of the theory of modes of subsistence that Adam Smith and the Scottish Enlightenment gave to the world in the late 18th century. Lucas's innovation is to integrate Ricardo's theory of rent with Malthus's theory of population, which he does on the basis of a neoclassical theory of household behaviour. He begins with a hunting-and-gathering economy in which land is commonly owned and asks what family size will sustain a self-reproducing equilibrium? As one puts the children's utility into the household's welfare function, this gives a forward orientation to the allocation problem. Enough has to be produced to sustain children, so the surplus requirement is clear. But since land is commonly owned, there is no problem of rent or wages. If, however, there is private ownership, the context changes. One could have equal private land ownership or a world with landlords and landless workers. In each situation, Lucas derives the equilibrium consumption level that is self-sustaining and embeds the various models in a comparable structure. The sequence of models is then extended to take in fertility and capital accumulation as well as technical progress. By the end, the Kuznets lectures connect up with the Marshall lectures at the beginning of the book.
The great merit of Lucas's models is that while they are mathematically rigorous, they are also very simple and transparent. He solves the forward optimisation problem using Bellman conditions, but his algebra is not ugly and no equation gets too messy. As he takes up complications such as class, he still manages to derive elegant and lucid solutions. In a way, this final essay is the most ambitious work by Lucas to date. While many economists, especially those influenced by Pierro Sraffa's work, have paraded their classical credentials, none has advanced the theory put forward by Smith or Ricardo or Marx in the way that Lucas has. The Kuznets lectures show that the neoclassical economists have a serious and progressive research programme that the so-called non-orthodox schools cannot match. In a sense, Lucas has now given a deeper meaning to new classical economics. This is a superb collection and will guide teaching as well as research for many years to come, as so much of Lucas's work already has done.
Lord Desai is professor of economics, London School of Economics.
Lectures on Economic Growth
Author - Robert E. Lucas Jr
ISBN - 0 674 006 5
Publisher - Harvard University Press
Price - £33.50
Pages - 204