I had thought that Hayek’s use of the markets concept helped to explain why Keynesian economics would ultimately fail. Each market participant would contribute his iota of information to determine prices, which would then reflect collective wisdom. Any tinkering by a “smart policy maker” would be undone, and thus this ended up as the kernel of the Lucas Critique.
But it seems Lucas became the foundation of later work, called RBC and then DSGE models, that came to be touted as “the best there is.” This is of course vainglorious and premature self-congratulation, what with the advent of the 2008 global financial crisis.
The explanation is perhaps that Lucas never really read Hayek. Very few mainstream economists did or do. But here’s an explanation by Paul de Grauwe. In short, de Grauwe considers DSGE/Lucas as “top down” models built on the short-circuitry of rational expectations (“If it doesn’t succeed, it must not have been rational; so it could not have happened”). But models running on Hayek’s ideas are “bottom up” models of incomplete information, which provide an alternative explanation of unemployment even as markets try to do their thing. It is better than Keynes because Keynes simply assumed wage and price rigidities (a failure of some kind of markets) and injected “animal spirits” to explain the Depression.
Bottom line: Lucas was a detour into not-quite-useful rationality. That is why macroeconomics is back to the drawing boards. Kind of like the Wise Guys having to stock up on home-made pasta and mattresses, waiting for a solution to their “territory” problems.