The New Classical Counter-Revolution: A False Path for Macroeconomics

Author(s): Laurence S. Seidman

Source: Eastern Economic Journal, Vol. 31, No. 1 (Winter, 2005), pp. 131-140
Published by: Palgrave Macmillan Journals
Stable URL: http://www.jstor.org/stable/40326326
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ECONOMICS FORUM
The New Classical Counter-Revolution:
A False Path for Macroeconomics
LaurenceS. Seidman
University
ofDelaware

In thisarticle,I contendthatthe"new"classicalcounter-revolution
thatbeganin
the 1970shas beena falsepathformacroeconomics
[Seidman,2003,ch. 11].

ANDTHELAUNCHING
OF THENEWCLASSICAL
LUCASANDSARGENT
COUNTER-REVOLUTION
In June1978,Lucas and Sargentlauncheda dramaticattackat theannualconferenceoftheFederalReserveBank ofBostonthatchangedthe directionofmacroeconomicsformanyyearsto come.Whatled to the attack?
In themid 1960s,Keynesianeconomicadvisers(likeAckleyand Okun)warned
PresidentJohnsonthat excess aggregatedemandthreatenedto generateinflation
taxincreasetodampdownconsumer
demand.Johnson
a prompt
stiff
andrecommended
came. WhentheNixonAdministration
imposedwage and price
delayedand inflation
thatoncethecontrols
wereremoved,
in 1971-72,
controls
predicted
Keynesianeconomists
wouldresumeifaggregatedemandremainedexcessive.Andso it did.From
inflation
1960to 1973,U.S. economichistorywas wellexplainedbyKeynesianeconomics.
was initiallya problemforKeynesianeconomics.
The 1973oil shock,bycontrast,
It was onlyin responseto the oil shockthatKeynesianeconomistsrecognizedthat
- the supply/demand
diagramtheyneededthe same basic toolas microeconomics
The AD/ASdiagram,
withthepricelevelplottedverticallyand outputhorizontally.
intotextbooksin the late 1970s by Keynesianeconomists(like Gordon),
introduced
explainedboththe 1960s and the 1970s.In the 1960s,the aggregatedemandcurve
But in themid-1970s,
theOPEC oil
shiftedright,so we gotmoreoutputand inflation.
shiftedup theaggregatesupplycurve,so
raisedthecostofU.S. production,
producers
we gotless outputbutmoreinflation.
does notnecessarilylead to a satisfacsomething
understanding
Unfortunately,
torypolicysolution.The newAD/ASdiagramshowedclearlythatan upwardsupply
shockwas inescapablybad news. It caused inflationand recessionsimultaneously,
and therewas no magicway to get rid ofbothtogether.The public,however,was
tofinda waytoreducebothinflafrustrated
bytheinabilityofKeynesianeconomists
tionand recessionsimultaneously.
ofDelaware,Newark,
Laurence S. Seidman: DepartmentofEconomics,411 PurnellHall, University
Delaware 19716. E-mail: seidmanl@lerner.udel.edu.

EasternEconomicJournal,Vol.31,No. 1,Winter2005
131

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132

EASTERNECONOMICJOURNAL

As theconference
convenedin June1978,at a momentofhighpublicdiscontent,
Lucas and Sargentdecidedto strikeat theveryfoundation
ofKeynesianeconomics
"After
and theleadershipofKeynesianeconomists.
their
entitled
presentation
They
had
won
that
Afterbriefly
KeynesianMacroeconomics."
public
conceding Keynesians
relationspointsin theearly1960s,theycontinued:
WedwellonthesehalcyondaysofKeynesianeconomics
because,without consciouseffort,
to recalltoday.In thepresent
theyare difficult
decade,the U.S. economyhas undergoneits firstmajordepression
sincethe 1930s,to the accompaniment
ofinflationratesin excessof
10 percentperannum...[Lucas and Sargent,1978,49].
Lucas and Sargentmadenomentionwhatsoeveroftheoilpricesupply
Incredibly,
shockthatsimultaneously
generatedboth"thefirstmajordepressionsincethe1930s"
and inflation
above10 percent.I have searchedtheirarticleinvainfortheword"oil."
Lucas and Sargentoffered
no explanationforthe stagflation
ofthe 1970s. Instead,
theyclaimedthatKeynesianshad predicteda decadeofeconomicsuccess:
Thatthesepredictions
werewildlyincorrect,
and thatthedoctrineon
whichtheywerebased is fundamentally
flawed,are nowsimplemattersoffact,involving
nonoveltiesin economictheory.The taskwhich
facescontemporary
studentsofthe businesscycleis thatofsorting
whichfeaturesofthatremarkthroughthe wreckage,determining
able intellectualeventcalled the KeynesianRevolutioncan be salvagedand puttogooduse,andwhichothersmustbe discarded[Lucas
and Sargent,1978,49-50].
Lucas and Sargentdenouncedthe use ofKeynesianmodelsto guidethe design
and implementation
ofcountercyclical
Klein,
policy.Yet at theverysame conference,
a pioneerofKeynesianeconometric
disturbances
models,showedhowinternational
suchas oil supplyshockscouldbe incorporated
intoKeynesianmodels,therebyprovidinga satisfactory
explanationofthe1970s.
At theconference,
Solowled theKeynesiancounterattack:
The questionis: whatare thepossibleresponsesthateconomists
and
economics
canmaketothoseevents[ofthe1970s]?Onepossibleresponse
is thatofProfessors
Lucas and Sargent.Theydescribewhathappened
in the 1970s in a verystrongway witha polemicalvocabulary...
Let
me quotesomephrasesthatI culledfromtheirpaper:"wildlyincorrect,""fundamentally
flawed,""wreckage,""failure,""fatal,""ofno
"dire
"failure
ona grandscale,""spectacular
recent
value,"
implications,"
"no
failure," hope." Nowiftheyweredoingthatjust to attractattenso thatpeopledon'tsay,"yesdear,yes,dear,"thenI
tion,foreffect,
would reallybe on theirside. Everyorthodoxy,
includingmyown,
needstohave a kickinthepantsfrequently,
topreventitfromgetting

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ECONOMICSFORUM

133

and applyingverylax standardsto itself.But I think

self-indulgent,
Lucas and Sargentreallyseemto be seriousin what
thatProfessors
in
and
turntheyhave a proposalforconstructive
research
theysay,
thatI findhardtotalkaboutsympathetically.
Theycall itequilibrium
and theysayveryfirmly
thatitis based ontwo
businesscycletheory,
behavior
and perpetual
terriblyimportantpostulates optimizing
marketclearing...
[Solow1978,203-04].
SolowsaidthatKlein,Fair,and othershad introduced
supplyintotheirKeynesian
modelsso thatan upwardsupplyshockfromworldoilpricesgeneratesbothinflation
and recession,nicelyexplainingthe 1970s.He continued:
movenowthatthereare already
So fastdoestheeconomics
profession
thatdothesupplysidequiteadequately...[Solow1978,206].
textbooks
But SolowopposedLucas and Sargent'snewclassicalagendanotonlyforitsfailureto mentiontheoil shockand its consequentinabilityto explainthe 1970s.Solow
postulateofperpetualmarketclearing.
rejectedtheircentralpre-Keynesian
strongly
It remindedSolowofthe claimsduringthe GreatDepressionthatthelabormarket
was purelyvoluntary.Solow
was clearingnicelyand any alleged "unemployment"
explained:
It is as plain as thenose on myfacethatthelabormarketand many
marketsforproducedgoodsdo not clear in any meaningfulsense.
Lucas and Sargentsay afterall thereis no evidencethat
Professors
labormarketsdonotclear,just theunemployment
survey.Thatseems
to me to be evidence.Suppose an unemployedworkersays to you,
"Yes,I wouldbe gladtotake a job liketheoneI have alreadyprovedI
can do because I had it six monthsago or threeor fourmonthsago.
AndI willbe glad toworkat exactlythesame wagethatis beingpaid
to thoseexactlylike myselfwhoused to be workingat thatjob and
happentobe luckyenoughstilltobe workingat it."ThenI'minclined
to label thata case ofexcess supplyoflabor and I'm notinclinedto
or anything
makeup an elaboratestoryofsearchor misinformation
ofthe sort...The notionthatexcesssupplyis nottherestrikesme as
implausible[Solow1978,208].
utterly
in responsetoLucas and Sargent'sassertionthat
Solowmadeonefinalcomment
macroeconomics
will
do
usingthe assumptionthat all marketsare always in
they
equilibrium:
competitive
Deep downI reallywish I couldbelievethatLucas and Sargentare
right,because the one thingI knowhow to do well is equilibrium
economics.The troubleis I feelso embarrassedat sayingthingsthat
I knoware nottrue[Solow1978,206-207].

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134

EASTERNECONOMICJOURNAL

Twoyearslater,Tobin[1980]emphasizedthatthemostcrucialassumptionofthe
newclassicaleconomicsis thecontinuousclearingofa competitive
labormarket.He
wrote:
The market-clearing
assumptionis just that,an assumption.It is not
Indeed,themainpracticalconjustifiedbyanynewdirectevidence...
of
the
to
is
what
extent,ifany,the ongoinginflationis
troversy
day
inertial...Suchinertiais a phenomenonof disequilibrium;
markets
are notalwaysclearingat thesewages and prices;therefore
demand
eventhoughunsurprising,
management
policies,
maybe abletoincrease
ordecreasebothquantitiesdemandedand quantitiessupplied.Thisis
theKeyensianmessage...[Tobin1980,788-89].
A fewyearslaterBlinderwrote:
The NewClassicalEconomics(NCE) counterrevolution
doesnotseem
to me to marka majorstepforwardfromthe Keynesiantraditionit
revivalofmarketclearingwas quixotic,in
supplanted.The attempted
the worstsense ofthe word...Does thatmean we had it all rightin
1972?Hardly...
I beginwitha briefmentionofan obviousflaw.Vintage
- whetheritwas Keynesianormonetarist
- was
1972macroeconomics
all aboutdemandfluctuations,
a termthenthoughttobe synonymous
witheconomic
fluctuations.
The 1970sand 1980sdestroyed
thisnarrowmindedfocusforever.
We nowknowthatMarshall'scelebratedscissors also comesin a gianteconomysize. Economicfluctuations
can,
and sometimesdo, emanatefromthe supplyside- fromoil shocks,
foodshocks,and thelike...[Blinder1989,108-111].
EMPIRICAL EVIDENCE AGAINST THE NEW CLASSICAL COUNTERREVOLUTION: THE 1982 RECESSION
Attheendofthe1970s,a sharppracticaldifference
betweenKeynesians
crystallized
and newclassicalsconcerning
a specificprediction.
Keynesianspredictedthatifthe
Federal Reserveapplied a tightmoneypolicyto the economy,it wouldthrowthe
economyintorecession,and that the recessionwould eventuallyreduceinflation.
withoutgeneratKeynesiansemphasizedthattightmoneycouldnotreduceinflation
a
recession.
The
reason
was
in
inertia
and
increases.
ing
settingwage
price
Having
the oil priceshocksofthe
gottenused to largewage and priceincreases(following
1970s),workersand managerswouldcontinueto set largeincreasesunlessa recession compelledthemto moderatethe increases.Onlywhenworkersfearedlayoffs
wouldtheyagreetosmallerwageincreases;onlywhenemployers
experienced
falling
demandand profits
wouldtheyhavethebackbonetoinsistonsmallerwageincreases.
Smallercostincreaseswouldthenpermitsmallerpriceincreases.
newclassicalscontended
thattheFederalReservecouldreduceinflaBycontrast,
tionwithoutgeneratinga recession.The reasonwas theirassumptionthatworkers
and employers
rationalexpectations
aboutwageand price
possessedforward-looking
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ECONOMICSFORUM

135

increases.IftheFed clearlysignaleditsintenttoreduceinflation
througha firmtight
would
workers
and
rational
immediately
expectlowerinflaemployers
moneypolicy,
to
smaller
and
would
and
hence
wage
tion,
immediately
agree
priceincreases.Thus,
wouldoccurwithouttheeconomygoingthroughrecession.
disinflation
was run.Atthebeginningofthe 1980sin theU.S., Britain,
Thentheexperiment
advancedcountries,the head ofthe centralbank puband mostothereconomically
inflation
and applieda tightmoneypolicy,evidencedbya very
liclypledgedtoreduce
sharprisein interestrates.In everycase, theeconomywas thrownintoa recession.
subsidewithouta recession.
In no case didinflation
BARRO'S HYPOTHESIS
thathas
a hypothesis
Barro(1974),propounded
Anothernewclassicaleconomist,
the
a
that
endear
"Ricardian
as
to
be
known
come
surelyhelped
equivalence" phrase
trade.
admiredRicardo'sanalysisofinternational
whorightly
toeconomists
hypothesis
I willcallit"Barroequivalence."
as unrealistic,
BecauseRicardorejectedthehypothesis
Barrocontendedthattheaveragepersonwouldentirelysave anyincometax cut
becausehe wouldactuallyengagein thefollowing
orcash transfer
reasoning:"Ifthe
leaves me withmorecash todaybyeithercuttingmytax or sendingme
government
have to tax me
it willhave to borrowmoretodayand willtherefore
a cash transfer,
to pay back its debt;so I betterset aside all ofthecash todayto get
moretomorrow
readyto pay the tax tomorrow."Clearly,if people reasonedthis way,temporary
Accordon currentconsumption.
wouldhave no effect
changesin taxesand transfers
raise
would
not
to
combat
a
recession
transfers
or
tax
cuts
to
ing Barro,Keynesian
not
work.
would
hence
and
demand
aggregate
that Barrohas neverprovidedany empiricaleviIt cannotbe overemphasized
dencewhatsoeverthat ordinarypeople thinkthis way. Even worse,he and other
economistswho acceptedthe truthofhis hypothesishave feltno need to discover
whetherordinarypeopleactuallyreasonthisway.In his macroeconomics
textbook,
Mankiw[2000]gave tworeasonswhyBarro'shypothesisis unrealistic:myopiaand
constraints.
Accordingto Mankiw,Ricardoconsideredthe argumentbut
borrowing
Mankiwwrites:
it
as
unrealistic.
rejected
AlthoughRicardoviewedthese alternativemethodsofgovernment
financeas equivalent,he didnotthinkotherpeoplewouldviewthem
as such...Ricardodoubtedthat peoplewere rationaland farsighted
It is one of
enoughto lookahead fullyto theirfuturetax liabilities...
thatRicardorejected
ofeconomic
thegreatironiesinthehistory
thought
thetheorythatnowbearshis name! [Mankiw,2000,424].
anecdotalevidencethatpeopledo notthinkBarro'sway
Thereis overwhelming
Barro'shypothesis,
whentheygeta tax cutortransfer-just ask anynoneconomist.
about
as
an
taken
be
to
deserve
not
does
empiricalproposition
seriously
therefore,
island
an
island
on
Barron
I suspectthateven a
theactualeconomy.
populatedonly
cut
or
transfer
a
tax
his
who
economists
and
other
Barro
might
accept
hypothesis
by
notbe entirelysaved.
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136

EASTERN ECONOMIC JOURNAL

PRESCOTT AND REAL BUSINESS CYCLES

Real businesscycletheoryis a branchofnew classicaleconomicsnotbecause it
shocks,but because it assumes all marketsare competitive
emphasizestechnology
are the
and clearinstantaneously
in outputand employment
so thatall fluctuations
shocks
and
of
in
to
choice
of
labor
consequence voluntary
supply response technology
aretherefore
real
business
the
of
cycletheory
sociallyoptimal.Perhaps leadingpioneer
in thefollowing
is Prescott.WhenPrescottused thephrase"economic
quote,
theory"
he meanttheorypremisedon the (dubious)assumptionofcontinuouscompetitive
equilibriumin thelabormarket:
Economictheoryimpliesthat,giventhenatureofshocksto technoland
ogy and people's willingnessand abilityto intertemporally
like
will
fluctuations
the
substitute, economy display
intratemporally
thosetheU.S. economy
In otherwords,theory
displays...
predictswhat
is observed...
Thepolicyimplication
ofthisresearchis thatcostlyefforts
at stabilizationare likelyto be counterproductive.
Economicfluctuationsare optimalresponsestouncertainty
in therateoftechnological
1986,21].
change.[Prescott,
Respondingto Prescott,Summerswrote:
A morefundamental
problemlies in Prescott'sassumptionaboutthe
in labor supply.He citesno
intertemporal
elasticityofsubstitution
directmicroeconomic
evidenceon thisparameter,whichis centralto
his modelofcyclicalfluctuations.
Nordoes he referto anyaggregate
evidenceon it...My ownreadingis thatessentiallyall the available
evidencesuggestsonlya minimalresponseoflaborsupplyto transisubtorywagechanges.Manystudies...suggestthattheintertemporal
stitutionmodelcannotaccountat eitherthemicroorthemacrolevel
forfluctuations
in laborsupply.[Summers,1986,24].
Summerschallengedreal businesscycletheoriststo identify
the sourceofeach
shockthatsupposedlycaused each recession:
allegednegativetechnology
Mysecondfundamental
objectiontoPrescott'smodelis theabsenceof
evidencefortheexistenceofwhathe
anyindependentcorroborating
callstechnological
shocks...
Prescott
assumesthattechnological
changes
areirregular,
butis unabletosuggestanyspecific
shocks
technological
whichpresagethe downturns
thathave actuallytakenplace.A reasonablechallengeto his modelis to ask howit accountsforthe 1982
themostseriousdownturn
ofthepostwarperiod[Summers,
recession,
1986,25].

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ECONOMICSFORUM

137

to Summers,theattemptto explaintheGreatDepressionas a conseAccording

shockis "absurd,"and otherpostwarrecessionshave
of
a
negativetechnology
quence
a moreplausibledemand-side
explanation:
Whileitis hardtoaccountforpostwarbusinesscyclehistory
bypointfor
the
account
offered
to
shocks,
by, example,Otto
ing technological
of
the
Allen
Sinai
of
how
each
and
Eckstein
majorrecessionswas
to controlinflationseemscomcausedbya creditcrunchin an effort
me.
to
26].
1986,
[Summers,
pelling
THE NEW CLASSICAL COUNTER-REVOLUTION AND THE ROLE OF
MATHEMATICS IN ECONOMICS
recruitedmanynewlymintedyoungecoThe new classical counter-revolution
nomicsPh.D.'s,despitetheempiricalunrealismofits crucialassumptions.How was
thispossible?By the timeofthe launchingofthe new classical counter-revolution,
skillthesolecriterion
forobtainhad mademathematical
universities
manytop-ranked
in
from
the
this
passage
Keynes'biographiingan economicsPh.D.,ignoring wisdom
cal sketchofhis teacherAlfredMarshall:
The studyofeconomicsdoesnotseemtorequireanyspecialisedgifts
ofan unusuallyhighorder.Is it not,intellectually
regarded,a very
easy subjectcomparedwiththe higherbranchesofphilosophyand
economistsare therarest
purescience?Yet good,orevencompetent,
few
excel!The paradoxfinds
at
which
An
ofbirds. easy subject,
very
mustpossessa
itsexplanation,
perhaps,in thatthemaster-economist
ofgifts.He mustreacha highstandardin several
rarecombination
andmustcombinetalentsnotoftenfoundtogether.
directions
different
No
He mustbe mathematician,
historian,statesman,philosopher...
mustlie entirelyoutsidehis
partofman'snatureor his institutions
140-141].
1963,
regard[Keynes
Here is an examplefromKeynes'GeneralTheoryofhis skillat observingactual
behavior:
tellsus,beyonddoubt,thata situationwhere
Nowordinary
experience
ratherthana real
labourstipulates(withinlimits)fora money-wage
is thenormalcase. Whilst
wage,so farfrombeinga merepossibility,
itis nottheir
workerswillusuallyresista reductionofmoney-wages,
in theprice
a
rise
there
is
whenever
labor
their
practicetowithdraw
It is sometimessaid thatitwouldbe illogicalforlabour
ofwage-goods.
but notto resista reductionof
to resista reductionofmoney-wages
realwages.Forreasonsgivenbelow,thismightnotbe so illogicalas it
so. Butwhether
appearsat first;and,as we shallsee later,fortunately

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138

EASTERNECONOMICJOURNAL
logicalor illogical,experienceshowsthatthis is how labourin fact
behaves.[Keynes,1936,9].

It is hardtoimaginea newclassicaleconomistsaying,"Butwhetherrationalorirrational,experienceshowsthatthishowlaborin factbehaves."

Thenewclassicalsubstitution
ofmathematics
forempiricalrealismis illuminated
new
marketwiththeempiricalwork
the
classical
to
the
labor
bycontrasting
approach
ofBewleyin his bookWhyWagesDon'tFall Duringa Recession[2000]forwhichhe
interviewedover300 businesspeople,unionleaders,job recruiters,
and unemploymentcounselors.Bewleyfoundthat employersresistpay cuts largelybecause the
savingsfromlowerwageswereusuallyoutweighed
bythecostoflowerworkermorale.
Managerspreferlayoffsto pay cutsbecause theyharmedmoraleless. It is hard to
ofinterviewing
labormarket
eventhinking
imaginenewclassicaleconomists
participants.
The drivingforcebehindnewclassicaleconomicsin academiawas thenewset of
mathematicalmodelsthatitprovidedfornewPh.D. candidatesand assistantprofessors.Instead ofrefining
whichhad been workedon conthe Keynesianframework,
tinuouslyforseveraldecades,theclassicalcounter-revolution
gaveyoungeconomists
ofthelate 1970sand 1980snewmathematicalmodelsto exploreand extend.Justas
decadesusingmathematics
todeveloptheimpliKeynesianshad spentseveralexciting
cationsofKeynesianassumptions,new classical economistshad the opportunity
to
use mathematics
to exploretheimplications
ofnewclassicalassumptions.
WHITHER NEW CLASSICAL ECONOMICS?
Nowa questionnaturallyarisesto anyeconomist:Ifnewclassicalmacroeconomicswas reallya defective
howcoulditprevailinthemarketplace?The answer
product,
is thatitdidnotprevail.Customersingovernment
and thebusinesscommunity
never
"bought"it. The FederalReserveBoardunderVolckerand Greenspanhas remained
thoroughly
Keynesian,continuously
practicing
countercyclical
monetary
policytocombatbothinflation
and recession.Thebusinesscommunity
takesitforgrantedthatthe
Fed willpracticesuchcountercyclical
policy,and therewouldbe widespreadalarmifa
new classicaleconomistbecamechairmanofthe Fed. The undergraduate
textbooks
thatdominatethemarketcontinue
touse a Keynesianframework
basedontheassumptionofstickywages and pricesand givea sympathetic
treatmentofcountercyclical
monetary
policyand automaticfiscalstabilizers.WhenrecessionhittheU.S. in 2001,
thepublicexpectedtheFed tocutinterestrates,and evenexpectedCongressand the
presidenttoprovidefiscalstimulus(likethe$600 rebate).The factis thatnewclassical economicsfailedin themarketplace.
Theonlyplacethatthenewclassicalcounter-revolution
succeededwas inacademia.
In academia,many"impractical,"
"unrealistic"
subjectsthrive,as theyshould,because
academia welcomesflightsofthe imagination,virtuosointellectualperformances,
and enjoyment
ofa subjectas an endin itself,whateveritsrealism.In academia,new
classicaleconomics
was at homewithmanyothersubjects.Undergraduates
(andtheir
as
tuition-paying
parents)toleratednewclassicaleconomics
professors
just theytolerate literatureand mathematics
professors.

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ECONOMICSFORUM

139

New classicaleconomicswilllast a longtimein academia.At manyuniversities,

nowsuperviseeconomicsPh.D. theses,hireassisnewclassicaleconomicsprofessors
and maketenuredecisions.Withtolerantconsumers,academiacan
tantprofessors,
exhibitsubstantialinertia.New classicaleconomistsare editorsofseveraleconomics
articlesuntiltheyretire.
journalsandwillcontinuetopublishnewclassicaleconomics
iftheywanttoinfluhave
to
notice
that
economists
Nevertheless,
begun
manyyoung
is
not
mathematics
alone
macroeconomic
actual
ence
enough:theywillhaveto
policy,
pay attentionto theempiricalrealismoftheirmodel'sassumptions.A youngecononewclassicaleconomicsmaywellsucceedin academia,butwilllikely
mistpracticing
failtohave anyimpacton actualmacroeconomic
policymaking.
I wanttoreturntotheprovocative
In conclusion,
quotefromLucas and Sargent's
at the1978conference.
Fromtoday's
launchingofthenewclassicalcounter-revolution
substiand
I
revision
of
their
a
offer
[Lucas
49-50],
1978,
Sargent,
quote
vantagepoint,
substitutions
for
counter-revolution
classical
new
Keynesianrevolution;my
tuting
intotheoriginalquoteare indicatedbybracketsbelow:
[I] dwellon thesehalcyondaysof[newclassical]economicsbecause,
torecalltoday...[Attheend
withoutconsciouseffort,
theyare difficult
ofthe 1970s,newclassicaleconomistspredictedthattheFederalReserve,and othercentralbanks,wouldbe able toengineerdisinflation
withoutrecessionbecause economicagentswererationaland labor
and clearedinstantaandproductmarketswereperfectly
competitive
and thatthe
werewildlyincorrect,
neously].That thesepredictions
doctrineon whichtheywerebased is fundamentally
flawed,are now
no noveltiesin economictheory.The
simplemattersoffact,involving
studentsofthebusinesscycleis that
taskwhichfacescontemporary
whichfeaturesofthat
ofsortingthroughthewreckage,determining
eventcalledthe[newclassicalcounter-revolution]
intellectual
remarkable
canbe salvagedandputtogooduse,andwhichothersmustbe discarded.

REFERENCES
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