R. lucas - what economist do (1988)

WHAT ECONOMISTS DO

Economists have an image of practicality and worldliness not shared by physicists and poets. Some economists have earned this image. Others--

myself and many of my colleagues here at Chicago--have not.

I'm not sure

whether you will take this as a confession or a boast, but we are basically story-tellers, creators of make-believe economic systems. Rather than tryto explain what this story-telling activity is about and why I think it is a useful--even an essential--activity, I thought I would just tell you a story and let you make of it what you like. My story has a point: I want to understand the connection between changes in the money supply and economic depressions. One way to

demonstrate that I understand this connection--I think the only reallyconvincing way --would be for me to engineer a depression in the United States by manipulating the U.S. money supply. I think I know how to do

this, though I'm not absolutely sure, but a real virtue of the democratic system is that we do not look kindly on people who want to use our lives as a laboratory. So I will try to make my depression somewhere else.

The location I have in mind is anold-fashioned amusement park--roller coasters, fun house, hot dogs, the works. I am thinking of Kennywood Park

in Pittsburgh, where I lived when my children were at the optimal age as amusement park companions - a beautiful, turn-of-the-century place on a bluff overlooking the Monongahela River. If you have not seen this

particular park, substitute one with which you are familiar, as I want youto try to visualize how the experiment I am going to describe would actually work in practice.

2 Kennywood Park is a useful location for my purposes because it is an entirely independent monetary system. the park. One cannot spend U.S. dollars inside

At the gate, visitors use U.S. dollars to purchase tickets and Rides inside are priced at so

then enter the park and spend the tickets.many tickets per ride.

Ride operators collect these tickets, and at the end

of each day they are cashed in for dollars, like chips in a casino. For obvioua reasons, business in park fluctuates: days, July 4 is even bigger. Sundays are big

On most concessions --I imagine each r i d e in

the park to be independently operated--there is some flexibility: an extra person can be called in tohelp take tickets or to speed people getting on a n d off the ride, on short-notice if the day is unexpectedly big or with advanced notice if it is predictable. If business is disappointingly slow, So "GNP" in the park

an operator will let some of his help leave early.

(total tickets spent) and employment (the number of man hours worked) will fluctuate from one day to the next due tofluctuations in demand. want to call a slow day--a Monday or a Tuesday, say--a depression? not. Do we Surely

By an economic depression we mean something that ought not to happen,

something pathological, not normal seasonal or daily ups and downs. This, I imagine, is how the park works. just making most of this up as I go along.) (I say "imagine" because I am Technically, Kennywood Park is

a fixedexchange rate system, since its central bank--the cashier's office at the gate-- stands ready to exchange local currency--tickets--for foreign currency--US dollars--at a fixed rate. In this economy, there is an obvious sense in which the number of tickets in circulation is economically irrelevant. No-one--customer or

concessioner --really cares about the number of tickets per ride exceptinsofar as these prices reflect U.S. dollars per ride. If the number of

3 tickets per U.S. dollar were doubled from 10 to 20, and if the prices of all rides were doubled in terms of tickets--6 tickets per roller coaster ride instead of 3--and if everyone understood that these changes had occurred, it just would not make any important difference. Such a doubling of the money

supply and of prices...