NEW CLASSICAL ECONOMICS TO MACROECONOMIC THEORY.
The New Classical Macroeconomics was developed by Robert Lucas, Thomas Sargent, Robert
Barro, Neil Wallace, and Patrick Minford. The new Classical Macroeconomics is an attempt
to repudiate and modify Keynesian and monetarist views about the role of macroeconomic
stabilization policy in the light of the classical school of thought. The Keynesians advocated
demand management policies, both fiscal and monetary, to stabilize the economy. They favour
active interventionist fiscal and monetary policies. In contrast, monetarists are highly critical
of discretionary fiscal and monetary policies. Friedman advocated government to follow a
sound monetary policy in which there is maximum freedom for individual initiative and
enterprise. During the late 1970s, when the debate between Keynesians and monetarists
stalemated, the new classical macroeconomics emerged based on classical microeconomics.
Important Features of New-Classical Macroeconomics:
➢ Rational Expectations: Individuals are assumed to have rational expectations,
meaning that they use all available information to form expectations about future
economic conditions. This implies that they respond to new information quickly and
accurately.
➢ Market Clearing: New-Classical economists emphasize the idea of market clearing,
where prices and wages adjust to clear markets and maintain equilibrium. They argue
that markets are flexible and adjust rapidly to changes in supply and demand.
➢ Microeconomic Foundations: New-Classical macroeconomics is characterized by a
strong emphasis on microeconomic foundations. It emphasizes the importance of
individual decision-making and interactions in determining aggregate economic
outcomes.
➢ Flexible Prices and Wages: Prices and wages are assumed to be flexible and adjust
quickly to changes in market conditions. This flexibility ensures that markets clear, and
the economy reaches equilibrium without prolonged periods of unemployment or
excess supply.
The New Classical Macroeconomics was developed by Robert Lucas, Thomas Sargent, Robert
Barro, Neil Wallace, and Patrick Minford. The new Classical Macroeconomics is an attempt
to repudiate and modify Keynesian and monetarist views about the role of macroeconomic
stabilization policy in the light of the classical school of thought. The Keynesians advocated
demand management policies, both fiscal and monetary, to stabilize the economy. They favour
active interventionist fiscal and monetary policies. In contrast, monetarists are highly critical
of discretionary fiscal and monetary policies. Friedman advocated government to follow a
sound monetary policy in which there is maximum freedom for individual initiative and
enterprise. During the late 1970s, when the debate between Keynesians and monetarists
stalemated, the new classical macroeconomics emerged based on classical microeconomics.
Important Features of New-Classical Macroeconomics:
➢ Rational Expectations: Individuals are assumed to have rational expectations,
meaning that they use all available information to form expectations about future
economic conditions. This implies that they respond to new information quickly and
accurately.
➢ Market Clearing: New-Classical economists emphasize the idea of market clearing,
where prices and wages adjust to clear markets and maintain equilibrium. They argue
that markets are flexible and adjust rapidly to changes in supply and demand.
➢ Microeconomic Foundations: New-Classical macroeconomics is characterized by a
strong emphasis on microeconomic foundations. It emphasizes the importance of
individual decision-making and interactions in determining aggregate economic
outcomes.
➢ Flexible Prices and Wages: Prices and wages are assumed to be flexible and adjust
quickly to changes in market conditions. This flexibility ensures that markets clear, and
the economy reaches equilibrium without prolonged periods of unemployment or
excess supply.
