An even bigger attack on Keynesianism came from Robert Lucas, the founder of a theory called rational expectations. Although one aspect of this theory won Lucas the Nobel Prize in 1995, history has not been kind to the rest of it. Lucas himself has abandoned work on rational expectations, devoting himself nowadays to other economic problems, and his once broad following has almost completely dissipated.

There are two main parts to rational expectations. First, Lucas believed that recessions are self-correcting. Once people start hoarding money, it may take several quarters before everyone notices that a recession is occurring. That's because individual businessmen may know that they are making less money, but it may take awhile to realize that the same thing is happening to everyone else. Once they do recognize the recession, however, the market quickly takes steps to recover. Producers will cut their prices to attract business, and workers will cut their wage demands to attract work. As prices fall, the purchasing power of the dollar is strengthened, which has the same effect as increasing the money supply. Therefore, government should do nothing but wait the correction out.

Second, government intervention ranges from ineffectualness to harm. Suppose the Fed, looking at the leading economic indicators, learns that a recession has hit. But this information is also available to any businessman in any good newspaper. Therefore, any government attempt to expand the money supply cannot happen before a businessman's decision to cut prices anyway. Keynesians are therefore robbed of the argument that perhaps the Fed might be useful in hastening a recovery, since Lucas showed that the Fed is not much faster than anyone else in discovering the problem.

Lucas then gave a slightly fuller version of the Milton Friedman argument outlined above. Suppose the Fed