Robert Lucas, 85, passed away this week. He was a prominent macroeconomist who won the 1995 economics Nobel. Others have remembered Lucas’s contributions to rationality and expectations in macroeconomics better than I could, including David Henderson in The Wall Street Journal and Tyler Cowen at Marginal Revolution.
Instead, I will focus on just one of Lucas’s quotations, from a 1988 paper titled “On the Mechanics of Economic Development.” In one paragraph, Lucas captures just about everything we work for at CEI.
Lucas opens his paper with two obvious points. The first is that some countries are rich, and others are poor. The second is that some countries grow quickly, while others grow slowly. Then on page 5, he explains why that matters:
I do not see how one can look at figures like these without seeing them as representing possibilities. Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what, exactly? If not, what is it about the “nature of India” that makes it so? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.
This is not a call to level global incomes with redistribution. Nor does it take the view that some countries are fated to be forever poor. Lucas saw possibilities. If Indonesia and Egypt can grow quickly, then India can, too.
India is, indeed, doing it. In 1990, two years after Lucas’ article, India elected a new government that began a liberalization program that to date has grown India’s per capita GDP more than six-fold. That is more than 600 percent growth in one generation.
GDP is just a proxy for things that really count, of course. Rising GDP in India has brought with it rural electrification, sanitation, education, and better health care. India’s growth is not limited to material goods. That added wealth has enabled cultural liberalization, such as the continued decline of India’s caste system, and improvements in women’s rights. Life expectancy grew by more than a decade from 1990-2019, from 58.7 years to 70.9 years. COVID lowered it to 68.2 years in 2021, which is still a net gain of seven and a half years.
India is not done yet. There is still a long way to go. India’s per-person GDP was still only a little more than $6 per day in 2021, compared to $192 per day in the United States. India’s current prime minister, Narendra Modi, has a nationalist streak that threatens to undo many of the post-1990 gains.
Lucas saw possibilities, not guarantees. In that regard, he was optimistic in the same way that Julian Simon was optimistic, along with former CEI Julian Simon Award winners Deirdre McCloskey and Johan Norberg, and this year’s co-winners, Marian Tupy and Gale Pooley.
People are capable of great things, but only if culture and institutions let them try. A culture that shuns innovation will grow slowly, no matter its economic policies. A country where the people value innovation, but live under an illiberal government, will also grow slowly. But a country that has both a market-tolerant culture and market-tolerant political institutions is unstoppable.
Culture and institutions don’t have to be perfect. This is a good thing, because perfection doesn’t exist. But where there is liberalism, more or less, there will be growth. Where people are free to explore possibilities, they will do so.
Lucas was not some doctrinaire classical liberal who went around quoting Mises and Hayek and my goal here is not to claim him as one. (Few things are less important than ideological purity tests, anyway.) Instead, I want to show that Lucas had his priorities straight, and to offer a reminder to keep ours straight as well.
Growth is important, even at the decimal point level, because growth compounds over time. Lucas was right that the consequences of compound growth for human welfare are staggering. And he was right that once someone understands this, it is difficult to think about anything else.
The power of compound interest is why India’s per-person income grew six-fold in 30 years, even though its growth never once reached 8 percent in any given year in the entire post-1990 period. The power of compound interest is why global living standards are up 30-fold since 1800 or so, despite global average growth of perhaps 2 to 3 percent per year.
When we at CEI oppose growth-killing policies like trade barriers and whole-of-government regulating, it’s with that compound growth in mind. Same as when we promote growth-enhancing policies like regulatory reform or sound monetary policy. The marginal impact of each of those policies is small. But with compound growth, decimal points matter.
More growth means more wealth people that can use to pursue the important things in life. These include health care to save and improve lives, more environmental protection, more charitable giving, more support for arts and culture, more human rights protections, and so much more.
Lucas is best known for his contributions to macroeconomics. His insights about inflation expectations are an important part of today’s inflation debate. But his forays into development economics are ultimately more important for his legacy. They give context to his better-known contributions to macro theory, and to our work at CEI.