The death of Robert Lucas, the esteemed economist from the University of Chicago, marks a significant loss for economics. Along with titans such as John Maynard Keynes and Milton Friedman, Lucas was one of the most influential economists of the 20th century, making significant contributions in macroeconomic policy, economic modelling, and our understanding of economic growth.

In 1995, Lucas was awarded the economics Nobel Prize, in part for his 1972 paper that undermined the postwar Keynesian paradigm. He contended that inflation did not affect long-term average unemployment, a sharp departure from a consensus that economic stimulus leading to higher prices could lower dole queues. Lucas was thus instrumental in shaping a new era for economics, ushering in the “new classical school” built upon the “rational expectations” of individuals and firms.

The 1970s would be a period of reckoning for Keynesian economics, as it grappled with the failures of its own policies. Governments had relied on models based on historical data observing a clear trade-off between prices and jobs. The belief was that monetary stimulus could reduce unemployment at the cost of higher inflation. Instead, demand management was producing stagflation, with rising inflation and high unemployment simultaneously.

Lucas’s “critique” and rational expectations theory provided an explanation. The old correlations between inflation and unemployment were not static; they were determined by the public’s perceptions about policy. If people internalised now that the government sought even higher inflation to reduce unemployment, economic actors would raise their prices and wage demands accordingly, undermining any jobs trade-off. The only way central banks could stimulate higher employment then was by continually surprising people through ever higher (and damaging) inflation.

This perspective, that the economic rules of the game are fluid and change in response to policy decisions, was revolutionary. Expectations were swiftly integrated into most economic models and independent central banks still worry mightily about them. “Micro-founded” models, which seek to understand macroeconomic phenomena through consumer and business behaviours are widely used.

These latter models have poor forecasting records, indicating that while Lucas’s insights revolutionised the field, they couldn’t solve the fundamental challenges of macroeconomic modelling. His conclusion about the limits of macroeconomic policy given humans’ propensity to adapt to new policies, however, remains profound.

Unfortunately, this wisdom hasn’t reached all policy debates. During the pandemic, lockdowns were justified by simplistic models that often assumed government regulations alone reduced human contact, ignoring the large voluntary behavioural changes in response to rising infections.

The government’s declared goal of halving inflation this year, instead of reaffirming the Bank of England’s 2 per cent target, also goes against Lucasian wisdom. If perceived a tolerance or endorsement for above-target inflation, such a pronouncement might raise inflation expectations and make the Bank of England’s efforts to bring down inflation, without harming output, more difficult. Taking expectations seriously made Lucas favourable to clear, credible policy rules over discretion.

As his career progressed, Lucas shifted attention from the huge issue of macroeconomic stability to the most important of all: economic growth. The potential welfare gains of getting the conditions for growth right were so “staggering,” he said, that it was hard to think about anything else.

This led to an unfortunately timed quotation, when in 2003 he claimed economics had solved “the central problem of depression-prevention,” earning him opprobrium when the financial crisis hit. Again, though, his point on emphasis was undoubtedly correct. Britain would have benefited from more focus on growth these past two decades, relative to both economic-firefighting and redistribution.