New classical school of thought

The New Classical School of thought, also known as the New Classical Macroeconomics, is a school of economic thought that emerged in the 1970s and 1980s as a response to the Keynesian economics that dominated the field at the time. The New Classical School is characterized by a focus on microfoundations, rational expectations, and the idea that markets are generally efficient and self-correcting.

Key features of the New Classical School:

  1. Microfoundations: New Classical economists emphasize the importance of understanding individual behavior and decision-making at the micro level, rather than relying on aggregate demand and supply curves.
  2. Rational Expectations: New Classical economists assume that individuals form expectations about future economic outcomes based on all available information, including past data and economic theory. This implies that individuals are able to predict future economic outcomes with a high degree of accuracy.
  3. Efficient Markets: New Classical economists believe that markets are generally efficient, meaning that prices reflect all available information and that it is impossible to consistently earn abnormal returns through market trading.
  4. Self-Correcting Markets: New Classical economists argue that markets are self-correcting, meaning that they tend to return to equilibrium on their own without the need for government intervention.
  5. Monetarism: Many New Classical economists, such as Milton Friedman, are associated with monetarism, which emphasizes the importance of controlling the money supply to stabilize the economy.

Notable economists associated with the New Classical School:

  1. Milton Friedman: A Nobel laureate and one of the most influential economists of the 20th century, Friedman is known for his work on monetarism and his critique of Keynesian economics.
  2. Robert Lucas: A Nobel laureate and one of the founders of the New Classical School, Lucas is known for his work on rational expectations and his critique of Keynesian economics.
  3. Thomas Sargent: A Nobel laureate and a leading figure in the New Classical School, Sargent is known for his work on rational expectations and his critique of Keynesian economics.
  4. Edward Prescott: A Nobel laureate and a leading figure in the New Classical School, Prescott is known for his work on business cycles and his critique of Keynesian economics.

Some of the key criticisms of the New Classical School include:

  1. Overemphasis on microfoundations: Critics argue that the New Classical School's focus on microfoundations can lead to a neglect of aggregate economic phenomena and the importance of government intervention in stabilizing the economy.
  2. Assumptions about rational expectations: Critics argue that the assumption of rational expectations is unrealistic and that individuals may not always form expectations based on all available information.
  3. Neglect of market failures: Critics argue that the New Classical School's emphasis on efficient markets and self-correcting markets can lead to a neglect of market failures and the importance of government intervention to correct these failures.

Overall, the New Classical School has had a significant impact on the development of macroeconomic theory and policy, and its ideas continue to influence economic thought and policy-making to this day.