ABSTRACT
The success of Keynesian economics posed a big challenge for orthodoxy. The conclusion that an active public policy was necessary to attain full employment had to be demolished. Friedman was the first to successfully volunteer for this job.
He started by restating the quantity theory of money. Misleadingly, he attributed to Marshall the Walrasian adjustment process, which allowed him to assert that Keynes did not apply Marshall’s adjustment process.
The novelty Friedman introduced is the existence of a long-run stable demand for real cash balances, the price level being the main adjusting variable.
Friedman’s main policy recommendation was that the money supply should increase by between 3 and 5 percent per year.
Friedman also made a contribution to an economic methodology that became an outstanding point of reference for both his followers and critics.
The name of Robert Lucas is associated with two drastic innovations in macroeconomics. The first is the precept that macroeconomics should be micro-founded. The second is the introduction of rational expectations in macroeconomic models.
The availability of new mathematical tools was decisive in Walras’s rehabilitation through the Arrow-Debreu general equilibrium model.
However, the conditions for general equilibrium are so demanding that the Arrow-Debreu model is mostly useful as an explanation of why the market’s “invisible hand” does not exist in the real world.
The chapter ends with an analysis of the concept of equilibrium in economics.
