Keynes, Lucas, and Scientific Progress By ALan S BLInDer In one of those marvelous coincidences of I. Are Expectations Rational intellectual history, Robert Lucas was born the year after the publication of Keynes Keynes, though no stranger to probability General Theory. For the first thirty-five years ocal in his of their mutual lives, the two apparently denial that expectations are what we now coexisted in harmony. But their relationship call rational since. Lucas has frequently criticized Keynesian economics as large prop our poor science, and it is precisely in that spirit that i want to address the debate today mism rather than on a mathematical We all know the old joke about the profes- expectation..Only a little than sor who uses the same exam questions year an expedition to the South Pole. is it after year, but changes the answers. That based on an exact calculation of ben- efits to come. Thus if anima joke encapsulates all too well what has hap- pened to macroeconomics these last fifteen dimmed and the spontaneous opti mism falters, leaving us to depend on years and seems to reflect poorly on econom nothing but a mathematical expect ics as a science. Or does it? On second tion, enterprise will fade and d thought, the best answers to scientific ques [1936,pp.161-62 tions do change as new observat ns are made, as new experiments are run, and as That attitude left a big loose end in The better theories are developed. The issue is General Theory. Business investment is sup whether the answers to important questions posedly driven by"the state of long-term in macroeconomics have changed for good expectations, but expectations are not scientific reasons or for other reasons pinned down by the theory, leaving substan The joke provides the framework for my tial room for gyrations in macroeconomic Ik. I will pose eight exam questions; and activity driven by autonomous changes in for each one I will summarize the answers animal spirits. That hardly constitutes a tight iven by Keynes, by Lucas and his followers, scientific theory; but Keynes was probably and by modern Keynesians. I pick only happy to leave the loose end loose. Modern questions that are answered differently by y“ sunspot theorists” have tightened the Keynesians and Lucasians and that are argument considerably, in ways that Keynes central to contemporary macroeconomic de- might have found congenial bates. The focus is on whether the Keynes- Lucas, of course, changes the answer to ian or new classical answers have greater yes. Was this change motivated by empirical claim to being"scientific "Each student evidence that subjective expectations match must answer every question the conditional expectations generated models-or even that actual expectations are unbiased and efficient? No. Indeed, Edward Prescott has boldly asserted that"surveys Princeton University, Princeton, NJ 08544. I cannot be used to test the rational expecta or correspondence tions hypothesis"(1977, p. 3). Rather, econo- th Ben Bernanke, Andrew Caplin, Mark Gertler, mists are supposed to convert to rational Reperi solow and Lawrence summers. a version of expectations(re) because of the unlove- avain paper with footnotes and complete references request to nisms that preceded it and because RE is