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:
“A full belly to the labourer was, in my opinion, the foundation of public morals and the only source of real public peace.”
—William Cobbett (1762–1835)
“Unlike Boswell, whose Journals record a long and unrewarded search for a self, Johnson possessed a formidable one. His life in London—he arrived twenty-five years earlier than Boswell—turned out to be a long defense of the values of Augustan humanism against the pressures of other possibilities. In contrast to Boswell, Johnson possesses an identity not because he has gone in search of one, but because of his allegiance to a set of assumptions that he regards as objectively true.”
—Jeffrey Hart (b. 1930)