Measurement, Quantification, and Economic Analysis: Numeracy in Economics

By Ingrid H. Rima | Go to book overview

Chapter 14

The New Classical macroeconomics

A case study in the evolution of economic analysis

Sherryl D. Kasper

During the 1970s economists witnessed radical changes in orthodox macroeconomic theory as the New Classical model replaced the Keynesian model as the standard framework of analysis. The theoretical transformation comprised two fundamental changes—first, the replacement of the disequilibrium premise of Keynesian analysis with a general equilibrium orientation and, second, the extension of the rationality hypothesis to accommodate the formation of expectations. Equally striking was the policy change that New Classical macroeconomics engendered: the corollary policy recommendation from the Keynesian interventionist stance to the New Classical proposition that the institution of a laissez-faire framework of predictable rules would provide better for macroeconomic growth and stability.

Even though the New Classical economists failed to persuade policy makers of the superiority of rules, they succeeded in fomenting a technical revolution in macroeconomic analysis. Macroeconomists routinely build stylized mathematical models that incorporate the tool of rational expectations. 1 Furthermore, the new classical revolution forced Keynesian economists to replace ad hoc assumptions about rigid prices with complex models that use microeconomic theory to explain how price rigidities or market failure in the capital, goods or labor markets lead to economic fluctuations. Given its continuing technical impact, the New Classical revolution provides fertile ground for studying the role of technique in influencing the development of economic analysis.

One way to study the role of technique in the New Classical revolution is by means of an in-depth examination of the research of a leading proponent. The research of Robert E. Lucas Jr will serve as the case study. Lucas stands as one of the originators of New Classical macroeconomics. He presented the first new classical model in his 1972 paper “Expectations and the neutrality of money”, and he has often served as a spokesperson for New Classical macroeconomics. 2 To accomplish the investigation of Lucas’s work, the next section will outline his research method. The section following will explain how he built on this research method to develop the New Classical model and

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