Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: WEDNESDAY, October 11, 1995                   TAG: 9510110102
SECTION: BUSINESS                    PAGE: B8   EDITION: METRO 
SOURCE: JEFF STURGEON STAFF WRITER
DATELINE:                                 LENGTH: Medium

NOBEL WINNER: PEOPLE THINK

Robert E. Lucas Jr. contributed more than any economist of his generation to "the standard toolbox" for studying macroeconomic forces such as wages, supply and demand, and inflation, the Royal Swedish Academy of Sciences said.

His work won't foretell next month's unemployment rate or the direction of interest rates, but it guides policy-makers in Congress and at the nation's think tanks who consider big-picture questions, such as how to finance health care or amend the tax code, said Mark Vitner, economist at First Union Corp. in Charlotte, N.C.

Lucas, a professor since 1975 at the University of Chicago, won the award and its $1 million prize for awakening federal policy-makers and others in the mid-1970s to the influence of individuals and businesses on economies.

Policy-makers at the time generally saw the national economy as a machine, which they could control by adjusting interest rates and the money supply to produce desired results, said John Whitaker, a professor of economics at the University of Virginia.

Lucas deciphered how people affect economies by anticipating and reacting to economic trends. He stressed that the human factor could no longer be ignored.

"The practical implication of my work has been, along with others, to make us a lot more skeptical about our ability to use monetary policy to fine-tune the economy,'' Lucas said Tuesday from his home on Chicago's North Side.

Lucas drew attention to his work in 1976 by challenging the long-held notion that the federal government could stimulate the economy and produce jobs by expanding the money supply and causing inflation. He explained the effort was futile because workers responded to higher prices by negotiating for higher wages, canceling out any beneficial effect.

"For it to have worked, essentially you'd have to have fooled people into accepting lower wages," said Richard Cothren, an associate professor of economics at Virginia Tech.

Lucas' work centered on ``rational expectations'' - a term describing the common-sense way that households or firms use available information about the future, and constantly update and reinterpret the information to make decisions about their own finances.

Under pre-Lucas thinking, if people had more money, they spent more money. Lucas taught that a worker confronted with a suddenly larger paycheck would buy more goods only if he knew the raise was permanent

Applied to a present-day example, Lucas would argue that a stock market crash like the one in 1987 would cause much less fear among investors than it did eight years ago, said Vitner of First Union. That's because the earlier crash had a silver lining - it proved a chance for many to buy shares at a bargain.

Similarly, if fixed rates for home mortgages were to rise to 12 percent, the Lucas theory would suggest a run on adjustable-rate mortgages on the expectation that mortgage rates eventually would come back down, Vitner said.

Lucas said nothing more than that "people behave as common sense would indicate," Vitner said.

The Associated Press contributed to this story.