Neorational Keynesonomics

Robert Lucas adds prognostication to his list of accomplishments in “Some Macroeconomics for the 21st Century,” a 2000 article published in the JEP.  This short article describes a fairly simple simulation of growth patterns across countries in a hypothetical alternate universe where, back in 1800, there were absolutely no differences in average income across equally populated (and one assumes equally naturally-endowed) countries.  Such a simulation produces results more or less similar to what we see in the relative growth data across nations over the past 200 years, and furthermore it suggests, says Lucas, that come 2100, income across nations will be high and relatively constant.  Lucas concludes (with tongue in cheek, one hopes) that those people living a century from now will be surprised to see that the conditions of the contemporary world very much agree with the predictions of Lucas’s simple model.  I will elaborate first on Lucas’s model and his discussion of it, and then conclude with my own thoughts.

As previously mentioned, Lucas’s model is based on a simulation wherein at time t = 0, a set of essentially homogeneous countries are standing behind a sort of economical starting gate.  The gate opens, but only such that one or a few countries are allowed to start their industrial revolutions in every time period.  The first to spring into the industrial revolution experiences a constant growth rate of 2% a year.  With each new time period, a new country or set of countries enters the industrial revolution and experiences unconditional convergence (in terms of income) to the first country.  The probability that any country enters into the industrial revolution is increased  over time as average world income increases (per the Solow growth model that we have all come to know and love).  In other words, countries’ incomes converge to that of the first country on the condition that they enter the industrial revolution, which occurs amongst more than 90 percent of all the countries by the year 2000.

There will, of course, be income inequality across countries (Lucas does not touch on income inequality within countries) as the countries enter the industrial revolution and begin the long process of convergence.  In fact, the model predicts that the variance of income distribution is at its peak in the decades from 1960 to about 2000.  Thereafter, inequality tapers off; by 2100, 300 years after the first country industrialized, the distribution of incomes exhibits a log standard deviation of about .5 and is still well on its way down.   

Lucas at least appears fairly convinced of the stylized facts of his model.  He recognizes that war, natural disasters, policy changes, and so forth will occasionally insinuate themselves, but these are not included in the model and in any event appear unimportant (in the long run).  One gets a feeling from Lucas that humans somehow interfere in their own indelible march towards Utopia; he does not rather think that the triumphs and trajectories and stops and starts of history are essential to the human experience.  To put this more concisely, humans don’t mean to get in the way of their own progress, though they sometimes do, and in the end things will work themselves out anyway - no worries.  In the long run, we’re all prosperous anyway.   

It sounds like the policy ineffectiveness hypothesis writ large.  Lucas reminds us that it doesn’t really matter what society you’re talking about - Communist/Socialist, ex-colonial, or run-of-the-mill post-industrial.  There may be ways to slow this process and ways to speed it up but there is no way to stop the march of progress. 

I will have more to say about this article as I develop my thoughts on the Hoover article.