Foundation and Assumptions
New classical economics is based on Walrasian assumptions. All agents are assumed to maximize utility on the basis of rational expectations. At any one time, the economy is assumed to have a unique equilibrium at full employment or potential output achieved through price and wage adjustment. In other words, the market clears at all times.
New classical economics has also pioneered the use of representative agent models. Such models have recently received severe neoclassical criticism, pointing to the clear disjuncture between microeconomic behavior and macroeconomic results, as indicated by Kirman (1992), and the fallacy of composition. In some ways, this critique is akin to the Cambridge capital controversy.
The concept of rational expectations was originally used by John Muth, and was popularized by Lucas. One of the most famous new classical models is the real business cycle model, developed by Edward C. Prescott and Finn E. Kydland.
Read more about this topic: New Classical Macroeconomics
Famous quotes containing the words foundation and/or assumptions:
“What is the foundation of that interest all men feel in Greek history, letters, art and poetry, in all its periods from the Heroic and Homeric age down to the domestic life of the Athenians and Spartans, four or five centuries later? What but this, that every man passes personally through a Grecian period.”
—Ralph Waldo Emerson (1803–1882)
“What a man believes may be ascertained, not from his creed, but from the assumptions on which he habitually acts.”
—George Bernard Shaw (1856–1950)