THE ECONOMIC RECORD DECEMBER ideology has long found more in the us new classical economists sought than in Europe. The timing macroeconomics in the image of neoclassical new classicism took root just microeconomics, recent developments in economi balance in America was shifting the right. theory may eventually lead to a reformulation of i don' t believe such ideas would have sold in micro theory that resembles Keynesian economics. American academia during the 1960s I will discuss each of these in turn, beginning with What I have just said about the theoretical and empirics ideological roots of new classical economics could Emnirical Evidence Against the New Classical ually well have been said about old classical economics. But the 1970s did not witness a revival of Pigou, or even of Friedman. It saw, instead In view of the normally strong interplay between movement towards the high-tech economic theory events and ideas, it is somewhat astounding that of Lucas and the high-tech econometrics of new classical economics caught on during the Sargent. The secret to the success of the new second half of the 1970s-a time when most of lassical economics is that it managed to be at the world s industrial economies were struggling once ideologically backward looking and to emerge, often unsuccessfully, from deep and long technologically forward looking. Given the temperrecessions of the times, that was a winning formula True to its classical roots, new classical theory Or, rather, it was a winning formula in academia dutton economy to cure recessions by wage-price mphasized the ability of a competitive price Outside the academy, the emphasis on theoreti purity(at the possible expense of empirical validity) deflation. Its early forms attributed downturns to and technical wizardry were liabilities, not assets. misperceptions about relative prices(such as real In addition, the leaders of the new school, wages) that arise when people do not know the particularly Lucas and Sargent, were disinclined current price level, and implied that unemployment to press their views on policy makers because they should vibrate randomly around its natural rate eemed macroeconomic science insufficiently ut such n misperceptions surely cannot be large in developed to support such advice. Finally, as we societies in which price indexes are published shall see the next section, the empirical monthly and the typical monthly inflation rate is of new classical theory were wide of under I per cent; and they cannot be persistent or all these reasons, the theory that if expectations are rational. Yet economic mia made hardly a ripple in the world fluctuations in the late 1970s and 1980s were bot large and persistent Later versions of new classical theory replaced I The Rise of Keynesian Economics perceived intertemporal terms of trade and added I have argued that empirical evidence played several features which produced persistent move little or no role in the fall of Keynesian economics ments in employment and output. 25 But empirical in academia, which I have attributed instead to research has never been able to find large inter- the theory's weak microeconomic underpinning to the curious sociology of our discipline, and to temporal substitution effects. And theories that the rise of right-wing ideology. 4 The story behind side of the labour market stumble over the facts eyne sanism is quite that labour supply looks to be quite inelastic(at different, for here the empirical failures of new least in the uS)and real wages are nearly constant classical economics are central. In additi over the business cycle. They also ha however,new strains of theory are beginning to time making the jump from persistent changes in resolve the tension between icroeconomics and macroeconomics in a fascinating way. Whereas nvoluntary-unemployment. In stark contrast, the Keynesian model may be no empirical problems. The most prominent one wa it is certainly a model of obably the collapse of the the US, Canada, and many other countries. While this So the events of the late 1970s seemed to suppo is commonly, and correctly, considered a disaster for ory and monetarism, it also poses a serious problem for the 25 For a review, see Barro(198 la)