Question

In the novel how the markets fail by John Cassidy, What was Lucas’ view on math in economics?

Answer 1

How markets fail by John Cassidy

The mathematical model is the same for expectations of prices, wages, and, other variables. This is termed as the rational expectation hypothesis. This hypothesis could be invoked he could write down equations to describe how Governments, workers, and, the firms behave. He used mathematical expectation. The solution derived is consistent with decision rules of citizens. The test of this model is done by assessing its explanatory power.

Lucas believed Mathematical Analysis is required for economic theory. He was Samuelson's student of economics as a branch of applied mathematics. Individuals are rational automatons who maximize mathematical functions such as profit functions, and, utility functions. He worked using Samuelson's idea of constructing economic theories. Economics gave up on Lucasian Economics in 1990s, working on real-world scenarios, rather than constructing mathematically elegant theories.