New classical economics

New Classical Economics is a school of economic thought that emerged in the 1970s as a response to the perceived limitations of Keynesian economics. It is also known as the "New Classical Revolution" or "Monetarism." The key figures associated with New Classical Economics are Milton Friedman, Robert Lucas, Thomas Sargent, and Edward Prescott.

The main ideas of New Classical Economics are:

  1. Methodological individualism: New Classical economists focus on the behavior of individual economic agents, such as households and firms, rather than aggregate variables like GDP or employment.
  2. Rational expectations: New Classical economists assume that economic agents form expectations about future economic outcomes based on all available information, including past data and current economic conditions. This implies that economic agents are able to predict the effects of monetary policy and other government interventions.
  3. Microfoundations: New Classical economists emphasize the importance of microeconomic foundations for macroeconomic phenomena. This means that macroeconomic variables, such as inflation and unemployment, are seen as the result of individual economic agents' decisions rather than the outcome of aggregate demand and supply forces.
  4. Monetary policy ineffectiveness: New Classical economists argue that monetary policy is ineffective in the long run because of the rational expectations hypothesis. According to this view, if the central bank increases the money supply, economic agents will simply expect higher inflation in the future and adjust their behavior accordingly, rendering the policy ineffective.
  5. Natural rate of unemployment: New Classical economists argue that there is a natural rate of unemployment, which is the rate of unemployment that occurs when the labor market is in equilibrium. This rate is determined by the intersection of the supply and demand curves for labor and is influenced by factors such as the minimum wage, labor market regulations, and the level of technological progress.
  6. Supply-side economics: New Classical economists emphasize the importance of supply-side factors, such as technological progress, human capital, and institutional factors, in determining economic growth and prosperity.

Some of the key criticisms of New Classical Economics include:

  1. Overemphasis on individual behavior: Critics argue that New Classical Economics neglects the role of aggregate demand and supply forces in shaping macroeconomic outcomes.
  2. Ignores the role of government: New Classical economists are often criticized for ignoring the role of government in shaping economic outcomes, particularly in terms of its impact on aggregate demand and supply.
  3. Too narrow a focus on monetary policy: Critics argue that New Classical Economics focuses too narrowly on monetary policy and neglects the importance of fiscal policy and other government interventions in shaping economic outcomes.
  4. Lack of empirical support: Some critics argue that the empirical evidence supporting New Classical Economics is limited and that the theory has been challenged by a number of empirical studies.

Overall, New Classical Economics has had a significant impact on the development of macroeconomic theory and policy, particularly in the areas of monetary policy and the role of government in the economy. However, it has also been subject to a number of criticisms and challenges, and its influence has waxed and waned over time.