The New Classical Counter-Revolution: False Path or Illuminating Complement?

Abstract

1. in their critique of Keynesian economics, Lucas and Sargent [1978] highlighted the failure of Keynesian models to explain the stagfl ation of the 1970s but failed even to mention the OPEC oil shock in their discussion; in contrast, once Keynesian economists had adapted the AD-AS framework to take into account the OPEC oil shock induced shifts of the AS curve, not only could Keynesian economics explain US economic history between 1960-73, it could also provide a plausible explanation of the ‘stagfl ation’ experience of the post 1973 period (see Blinder [2002]); 2. ‘the only place that the new classical counter-revolution succeeded was in academia’, it had little impact during either the Volker or Greenspan eras, during which time practical macroeconomic policymaking remained ‘thoroughly Keynesian, continuously practicing countercyclical monetary policy to combat both infl ation and recession;’ furthermore, new classical economics did not have any infl uence in the wider business community; 3. the predictions of the new classical monetary models were refuted by the experience of the 1982 recession in the US, and both real business cycle theory, and the Ricardian equivalence hypothesis do not stand up to empirical scrutiny; 4. ‘undergraduate textbooks that dominate the market continue to use a Keynesian framework;’ 5. the attraction of new classical economics within academia has been driven mainly by the ‘new set of mathematical models that it provided for new PhD candidates and assistant professors.’