New classical economics
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New Classical Economics emerged as a school in Macroeconomics during the 1970s. As opposed to Keynesian macroeconomics, it builds its analysis on an entirely neoclassical framework. Specifically, New Classical Macroeconomics (NCM) emphasises the importance of rigorous microfoundations (where the macroeconomic model is built up from the actions of individual agents, whose behaviour is modelled by microeconomics). New Keynesian economics was developed partly in response to NCM - it strives to provide microfoundations for Keynesian economic analysis.
Several assumptions are common to most New Classical models. Primarily, all agents are assumed to be rational (utility-maximising) and possess rational expectations. At any one time, the macroeconomy is assumed to have a unique equilibrium at full employment or potential output and this equilibrium is assumed to always have been achieved via price and wage adjustment (market clearing).
New Classical Economics has also pioneered the use of representative agent models. Such models have recently received severe neoclassical criticism, pointing to the clear disjuncture between microeconomic behavior and macroeconomic results, as indicated by the Sonnenschein-Mantel-Debreu theorem (Kirman, 1992) and the fallacy of composition. In some ways, this critique is akin to the Cambridge capital controversy, which discredited the neoclassical aggregate production function.
The most famous New Classical model is that of Real Business Cycles, developed by Robert Lucas Jr, Finn E. Kydland and Edward C. Prescott, building upon the ideas of, among others, John F. Muth.
External links
- Article from Economics Encyclopedia. (http://www.econlib.org/library/Enc/NewClassicalMacroeconomics.html)
References
- Alan P. Kirman, "Whom or What does the Representative Individual Represent?" Journal of Economic Perspectives 6(2), Spring 1992: 117-136.
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Macroeconomic schools of thought |
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Keynesian economics | Monetarism | New classical economics |