Introduction

During the 1970s (at least as far as the United States was concerned) the new classical research programme replaced monetarism as the main counterrevolutionary theory to Keynesianism. The primary objective of early new classical theorists was to build macroeconomic models based on firm microeconomic foundations involving continuous market clearing and optimization by economic agents. The leading US exponents of, and/or contributors to, the first phase of this research programme include Robert Lucas Jr, Thomas Sargent, Robert Barro, Edward Prescott and Neil Wallace. In their 1978 paper entitled ‘After Keynesian Macroeconomics’ (reprinted on pp. 270-94), Robert Lucas and Thomas Sargent argue that Keynesian models in the 1960s were fatally flawed as they lacked sound microfoundations and incorporated an adaptive expectations hypothesis which is inconsistent with maximizing behaviour. In addition to these theoretical failings they also argue that in the 1970s Keynesian macroeconometric models experienced ‘econometric failure on a grand scale’ and that being subject to the Lucas critique could not be used to guide policy. In their place Lucas and Sargent advocate ‘equilibrium’ new classical models (in which markets always clear and ‘rational’ agents optimize) suggesting that equilibrium models can account for the main features of the business cycle with economic fluctuations being triggered by unanticipated (monetary) shocks. In the final section of their paper they respond to four lines of criticism which have been raised against equilibrium new classical models relating to the assumption of continuous market clearing, the observed persistence of cyclical movements in output and employment, linearity, and the neglect of learning. For a discussion of the rhetoric surrounding this article see Backhouse (1997).