Classicalist vs new classicalist in monetary economy

A fascinating topic!

In the context of monetary economics, Classicalists and New Classicalists are two schools of thought that have shaped the development of macroeconomic theory. While both share some similarities, they differ in their views on the role of government, the behavior of economic agents, and the effectiveness of monetary policy.

Classicalists (Old Classicalists)

Classical economists, such as Adam Smith, David Ricardo, and Thomas Malthus, emerged in the 18th and 19th centuries. They believed in the following principles:

  1. Laissez-faire: Governments should not intervene in the economy, as this would lead to inefficiencies and distortions.
  2. Natural rate of unemployment: The economy would naturally settle at a full employment level, with any deviations caused by external shocks or government intervention.
  3. Say's Law: Supply creates its own demand, meaning that production is always matched by demand.
  4. Money is neutral: Changes in the money supply do not affect real economic variables, such as output and employment.

Key proponents of Classical economics include:

New Classicalists

New Classical economics emerged in the 1960s and 1970s, primarily in response to the failures of Keynesian economics. New Classicalists, such as Robert Lucas, Thomas Sargent, and Edward Prescott, challenged the traditional Keynesian view of the economy. They believed in:

  1. Rational expectations: Economic agents form expectations about future economic variables based on all available information, including government policies.
  2. Microfoundations: Macroeconomic phenomena can be explained by the behavior of individual economic agents, rather than by aggregate demand and supply curves.
  3. Monetary policy ineffectiveness: Monetary policy is ineffective in the long run, as changes in the money supply are quickly anticipated by economic agents and do not affect real economic variables.
  4. Natural rate of unemployment: The economy would naturally settle at a full employment level, with any deviations caused by external shocks or government intervention.

Key proponents of New Classical economics include:

Key differences

The main differences between Classicalists and New Classicalists are:

  1. Government intervention: Classicalists believed in minimal government intervention, while New Classicalists argue that government policies can be ineffective or even counterproductive.
  2. Expectations: Classicalists did not consider expectations as a key factor in shaping economic behavior, while New Classicalists emphasize the importance of rational expectations.
  3. Monetary policy: Classicalists believed that monetary policy can be effective in the short run, while New Classicalists argue that it is ineffective in the long run.

In summary, while both Classicalists and New Classicalists share some similarities, they differ in their views on the role of government, the behavior of economic agents, and the effectiveness of monetary policy.