Lucas critique
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The Lucas Critique says that it's naive to try to predict the effect of a policy experiment based on correlations in historical data. For example, Fort Knox has never been robbed, but that doesn't mean we can safely eliminate the guards. If we do want to predict the effect of a policy experiment, we must model the "deep parameters" (preferences and constraints) that govern individual behaviour. We can then predict what individuals will do conditional on the change in policy.
The basic idea is old, but in a 1976 paper Robert Lucas drove the point home that this simple notion invalidated many then extant models of the economy, principally Keynesian models such as the Phillips curve and the IS-LM model, and hence the ability of the government to mount an active stabilisation policy.
The Lucas Critique was influential not only in casting doubt on many models of the economy but also in encouraging macroeconomists to build microfoundations for their models. Microfoundations had always been thought to be desirable; Lucas showed they were necessary.
Further reading
- Lucas, Robert (1976). Econometric Policy Evaluation: A Critique. Carnegie-Rochester Conference Series on Public Policy 1: 19–46.
See also
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