A Macroeconomics Reader

By Brian Snowdon; Howard R. Vane | Go to book overview

14

The new-classical contribution to macroeconomics

David Laidler

Banca Nazionale Del Lavoro Quarterly Review (1986) March, pp. 27-55


INTRODUCTION

Macroeconomics is prone to ‘revolutions’—intellectual upheaval in which some new idea or ideas claiming to establish fresh and valid insights into the workings of the economic system sweep away a prevailing orthodoxy. Since the mid-1930s the ‘Keynesian revolution’ has overwhelmed ‘classical economies’ so-called, to be succeeded in turn by a ‘monetarist revolution’ which seemed to overthrow ‘Keynesian’ economics. Since the early 1970s ‘monetarism’ has in turn yielded to a ‘new-classical revolution’ which self-consciously, and much more thoroughly than monetarism, has sought to reestablish macroeconomics on foundations that bear a close resemblance to those of certain strands in pre-Keynesian economics. 1 In every case, the superiority of the ‘new’ approach has undoubtedly been oversold by its adherents, but, at the same time, insights and tools of lasting value have also been added to the corpus of economic knowledge.

This chapter is devoted to assessing new-classical ideas, and to asking what of lasting importance this school of macroeconomics has contributed since the early 1970s. It deals in turn with the relationship between new-classical economics and monetarism, the relative explanatory power of these two bodies of doctrine over empirical evidence, and the claims of new-classical economics to embody a superior analytic method. It argues that, although the particular ways in which new-classical macroeconomics has applied its basic ideas, notably in its insistence that the interaction of the maximizing behaviour of individuals be analysed in the context of continuously clearing markets, and that agents’ expectations be represented by the predictions of the true model of the economy in which they operate, are unnecessarily restrictive, its stress on equilibrium behaviour conditioned by the state of individual agents’ expectations as a basis for macro modelling is nevertheless valuable, and has been salutary for the discipline.


MONETARISM AND NEW-CLASSICAL MACROECONOMICS

New-classical macroeconomics was initially a response to the inflation of the 1960s and 1970s, and to monetarist analysis of that inflation. Indeed, in

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