Opposing Keynesianism: New Classical Macroeconomics from Rational Expectations, Through Real Business Cycles, to DSGE and (the So Called) New Keynesians

Criticisms of the economics of Keynes and Keynesianism, mainly in the IS-LM version and its associated ‘big macro models,’ were always present although, as we have seen, in the 1950s and 1960s their influence was very constrained. This changed, however, during the last quarter of the twentieth century as a set of novel ideas challenged conventional macroeconomics and gradually transformed the sub-field and became hegemonic. Robert Lucas led the new tendency, known as New Classical Macroeconomics [NCM], though clearly others contributed. A crucial leap forward on the path of NCM occurred in the early 1980s with the advent of the Real Business Cycles theory [RBC]. Around the mid-1990s, a new, divergent tendency took shape; it adopted important methodological assumptions from NCM but took a clear distance from the RBC’s uncompromising position on policy while defending certain traditional Keynesian ideas. The label attached to this new tendency, New Keynesian macroeconomics (NK), was confusing to many. New Classical macroeconomists directed severe criticisms at Keynesian economics. One of the better-known disputes emerged in 1978, when Lucas and Sargent presented a renowned paper entitled “After Keynesian Economics,” and Lucas’s “The Death of Keynesian Economics” provided a controversial account since it was presented in 1980.