If so, it is worth examining whether the effort to stabilize economic activity, which has in fact borne fruit in recent decades, is actually important and worthwhile. The economist Robert Lucas examined this question in 1987 by estimating the negative impact to well-being that results from volatility in consumption, assuming that potential consumption increases at a fixed rate while actual consumption is volatile.
Lucas’s model shows that the consumption value that individuals will agree to pay for completely cancelling volatility—for convenience, let’s call it the “insurance premium for nonvolatile consumption"—is near zero. This means that the value to the consumer of smoothing consumption is negligible, and we can theoretically conclude that there is no tremendous value to a stabilizing policy.