In 1960's, economists found neoclassical aggregate-production function too simple {capital controversy} {Cambridge capital controversy} and now use multi-sectoral models, such as those of Leontief and Schraff. New classical economics uses aggregate-production functions.
Macroeconomic policy can maintain employment levels in free-market economies {neoclassical synthesis}.
A macroeconomics school {new Keynesian macroeconomics} combined microeconomic and macroeconomic models to modify Keynesian macroeconomics.
In 1970's, new macroeconomics school {new classical macroeconomics} (NCM) {new classical economics} built macroeconomic models from individual and company microeconomic behavior, in opposition to Keynesian macroeconomics.
history
Robert Lucas, Jr., Finn E. Kydland, and Edward C. Prescott developed New-Classical models {Real Business Cycles}, based on John Muth's ideas.
assumptions
NCM assumes that behavior maximizes utility and uses rational expectations and that markets can reach equilibrium through free exchange of prices and wages {market clearing}.
model
New classical economics can use representative-agent models. Agents, such as average consumer or producer, always optimize and have rational expectations. If productivity changes, business has cycles. Agent does not work if productivity and wages decline, waiting until they rise again, so government intervention does not work, since agents have full information.
Consumers or producers {representative agent} optimize. Agent optimizations determine economy demand or supply curves. Composition fallacy and Sonnenschein-Mantel-Debreu theorem of Kirman [1992] critically examine representative-agent models.
In monetary theory, money supply equals ratio, between money holdings and total income, times total income {Cambridge equation}. In this theory, money-supply increase increases prices. However, this theory is false.
In monetary theory, money supply times money transaction velocity equals physical output times average price index {Fisher equation} {quantity equation} {exchange equation}, because total spending equals total price. In this theory, money-supply increase increases prices, because demand increases. However, this theory is false.
In monetary theory, economy output increases faster than purchasing power increases, causes high inventories, and then causes recession and unemployment {Social Credit movement}, so government needs to add purchasing power early in cycle, to balance output and demand.
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Date Modified: 2022.0225