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New classical macroeconomics emerged as a school in macroeconomics
Macroeconomics

Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole....
 during the 1970s. As opposed to Keynesian
Keynesian economics

Keynesian economics The theories forming the basis of Keynesian economics were first presented in The General Theory of Employment, Interest and Money, published in 1936....
 macroeconomics, it builds its analysis on an entirely neoclassical
Neoclassical economics

Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distribution s in markets through supply and demand, often as mediated through a hypothesized maximization of income-constrained utility by individuals and of cost-constrained profits of firms employing avai...
 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
Microeconomics

Microeconomics is a branch of economics that studies how individuals, households and firms and some states make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold....
. New Keynesian economics
New Keynesian economics

New Keynesian economics is a school of contemporary macroeconomics that strives to provide microfoundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of New classical macroeconomics....
 was developed partly in response to NCM – it strives to provide microfoundations
Microfoundations

In economics, the term microfoundations refers to the microeconomics analysis of the behavior of individual Agent such as households or firms that underpins a macroeconomics theory...
 for Keynesian economic analysis.

Several assumptions are common to most New Classical models.






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New classical macroeconomics emerged as a school in macroeconomics
Macroeconomics

Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole....
 during the 1970s. As opposed to Keynesian
Keynesian economics

Keynesian economics The theories forming the basis of Keynesian economics were first presented in The General Theory of Employment, Interest and Money, published in 1936....
 macroeconomics, it builds its analysis on an entirely neoclassical
Neoclassical economics

Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distribution s in markets through supply and demand, often as mediated through a hypothesized maximization of income-constrained utility by individuals and of cost-constrained profits of firms employing avai...
 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
Microeconomics

Microeconomics is a branch of economics that studies how individuals, households and firms and some states make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold....
. New Keynesian economics
New Keynesian economics

New Keynesian economics is a school of contemporary macroeconomics that strives to provide microfoundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of New classical macroeconomics....
 was developed partly in response to NCM – it strives to provide microfoundations
Microfoundations

In economics, the term microfoundations refers to the microeconomics analysis of the behavior of individual Agent such as households or firms that underpins a macroeconomics theory...
 for Keynesian economic analysis.

Several assumptions are common to most New Classical models. Primarily, all agents are assumed to be rational
Rationality

Rationality as a term is related to the idea of reason, a word which following Webster's may be derived as much from older terms referring to thinking itself as from giving an account or an explanation....
 (utility-maximising) and possess rational expectations
Rational expectations

Rational expectations is an assumption used in many contemporary Model , and also in other areas of contemporary economics and game theory and in other applications of rational choice theory....
. At any one time, the macroeconomy is assumed to have a unique equilibrium
Economic equilibrium

In economics, economic equilibrium is simply a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change....
 at full employment
Full employment

In macroeconomics, full employment is a condition of the national economy, where nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so....
 or potential output
Potential output

In economics, potential output refers to the highest level of real vs. nominal in economics Gross Domestic Product output that can be sustained over the long term....
 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
Representative agent

Economists use the term representative agent to refer to the typical decision-maker of a certain type .More technically, an Model is said to have a representative agent if all Agent of the same type are identical....
 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
Fallacy of composition

A fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole ....
. In some ways, this critique is akin to the Cambridge capital controversy, which discredited the neoclassical aggregate production function
Production function

In economics, a production function is a Function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs....
.

The most famous New Classical model is that of Real Business Cycles, developed by Robert Lucas, Jr.
Robert Lucas, Jr.

Robert Emerson Lucas, Jr. is an United States economist at the University of Chicago. He was named among the 10 best economists, and received the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1995....
, Finn E. Kydland
Finn E. Kydland

Finn Erling Kydland is a Norway economics. He is currently the Henley Professor of Economics at the University of California, Santa Barbara. He also holds the Richard P....
, and Edward C. Prescott
Edward C. Prescott

Edward Christian Prescott is an American economist. He received the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 2004, sharing the award with Finn E....
, building upon the ideas of, among others, John Muth
John Muth

John Fraser Muth was an American economist. He is known as "the father of the rational expectations revolution in economics", primarily due to his article "Rational Expectations and the Theory of Price Movements" from 1961....
.

External links

  • Robert King's article from the Concise Encyclopedia of Economics at the Library of Economics and Liberty.