New classical economics
From Wikipedia, the free encyclopedia
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 foundations, in which the macroeconomic model is built in analogy to the actions of individual agents, whose behaviour is modelled by microeconomics, in spite of the fact that microeconomic postulates do not carry over to macroeconomics (→Sonnenschein-Mantel-Debreu Theorem). 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 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 Muth.
[edit] External links
[edit] References
- Alan P. Kirman, "Whom or What does the Representative Individual Represent?" Journal of Economic Perspectives 6(2), Spring 1992: 117-136.
| Macroeconomic schools of thought |
|---|
| Keynesian economics • Monetarism • New classical economics • New Keynesian economics • Neo-Keynesian Economics • Austrian School • Supply-side economics • Post-Keynesian economics |
