A Case Study of the Pioneers
Chapter 7: Robert E. Lucas, Jr. and New Classical Economics
7. Robert E. Lucas, Jr and new classical economics The professional reception to the research of Robert E. Lucas, Jr (b. 1937) brings full circle the evolution in the attitude toward laissezfaire in twentieth-century macroeconomics. In the early 1970s he began work on the new classical models ostensibly as an extension of the natural rate hypothesis developed by Friedman and Phelps; by the end of the decade these models emerged into the standard framework for analysis in macroeconomic theory. As a result, in much the same fashion that Friedman developed the monetarist counter-example in the framework of Keynesian economics, Keynesian economists began to formulate their research in new classical structures.1 Further, the new classical models demonstrated more rigorously than those developed by Friedman and Buchanan that the economy is managed more efficiently with a laissez-faire framework of policy rules. For these models portray discretionary policy as ineffective in offsetting business cycles in both the long run and the short run and as a cause of instability in the economy. In effect, Lucas had inspired a counter-revolution against Keynesian economics and its interventionist policy prescriptions. In 1995, the Nobel Committee awarded Lucas, the leader of this revolution, its prize in economics ‘for having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeconomic analysis and deepening our understanding of economic policy’. This change in prominence from Keynesian to new classical models took place in a professional environment influenced by both external events and internal debates. In 1965 an...
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