The Nobel committee's decision to award its economics prize to Professor Robert Lucas of the University of Chicago will arouse far less controversy than the work he won it for.
Professor Lucas, the fifth University of Chicago economics professor to win the prize in six years, transformed macro-economic analysis. In the course of a few years, from 1976 to 1982, he set in train one of the rare revolutions in economic thought. His hypothesis of "rational expectations" provided the theoretical underpinning for the resurgence of free market economics.
The theory boils down to the beautifully simple idea that economic agents - whether individuals negotiating wages, investors buying bonds or companies making investment plans - do not systematically get their forecasts wrong. On average, people will get their predictions of inflation, in particular, about right. And they definitely will not be wrong more often than governments.
Professor Lucas's insight swept the profession like wildfire. It meant, for instance, that economists could no longer defend the idea that by inflating the economy a government could permanently reduce unemployment. With rational expectations, workers will swiftly adjust wage claims to compensate, returning unemployment to its original level. …