Lucas Critique

The Lucas Critique is a concept in economics that warns against relying on historical data to predict the effects of policy changes. It explains that people's behavior tends to change when policies change, so models based on past behavior may no longer be accurate. For example, if a government lowers taxes, people might work more or less depending on their expectations, which can alter the economy in unforeseen ways. Therefore, economists need to create models that consider how people's reactions can change when policies are adjusted, ensuring predictions remain reliable under different scenarios.