page_title: History of macroeconomic thought
section_title: New classical economics
hierarchical_section_title: History of macroeconomic thought / New classical economics
context_page_description: Macroeconomic theory has its origins in the study of business cycles and monetary theory. In general, early theorists believed monetary factors could not affect real factors such as real output. John Maynard Keynes attacked some of these "classical" theories and produced a general theory that described the whole economy in terms of aggregates rather than individual, microeconomic parts. Attempting to explain unemployment and recessions, he noticed the tendency for people and businesses to hoard cash and avoid investment during a recession. He argued that this invalidated the assumptions of classical economists who thought that markets always clear, leaving no surplus of goods and no willing labor left idle.
  The generation of economists that followed Keynes synthesized his theory with neoclassical microeconomics to form the neoclassical synthesis. Although Keynesian theory originally omitted an explanation of price levels and inflation, later Keynesians adopted the Phillips curve to model price-level changes. Some Keynesians opposed the synthesis method of combining Keynes's theory with an equilibrium system and advocated disequilibrium models instead.
context_section_description: "New classical economics" evolved from monetarism and presented other challenges to Keynesianism. Early new classicals considered themselves monetarists, but the new classical school evolved. New classicals abandoned the monetarist belief that monetary policy could systematically impact the economy, and eventually embraced real business cycle models that ignored monetary factors entirely.
  New classicals broke with Keynesian economic theory completely while monetarists had built on Keynesian ideas. Despite discarding Keynesian theory, new classical economists did share the Keynesian focus on explaining short-run fluctuations. New classicals replaced monetarists as the primary opponents to Keynesianism and changed the primary debate in macroeconomics from whether to look at short-run fluctuations to whether macroeconomic models should be grounded in microeconomic theories. Like monetarism, new classical economics was rooted at the University of Chicago, principally with Robert Lucas. Other leaders in the development of new classical economics include Edward Prescott at University of Minnesota and Robert Barro at University of Rochester.
  New classical economists wrote that earlier macroeconomic theory was based only tenuously on microeconomic theory and described its efforts as providing "microeconomic foundations for macroeconomics." New classicals also introduced rational expectations and argued that governments had little ability to stabilize the economy given the rational expectations of economic agents. Most controversially, new classical economists revived the market clearing assumption, assuming both that prices are flexible and that the market should be modeled at equilibrium.
caption: Much of new classical research was conducted at the University of Chicago.
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