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

This article contends that the "new" classical counter-revolution that began in the 1970s has been a false path for macroeconomics. Keynesian economics nicely explained the 1970s stagflation that followed the world oil price hike with a shift up of the supply curve in its AD/AS diagram. Lucas and Sargent ignored oil, could not explain the 1970s stagflation, and committed the fatal mistake of assuming instantaneous labor-market clearing. Barro assumed without empirical evidence that consumers entirely save any tax cut because they want to be ready to pay higher future taxes. Prescott's fatal mistake with real business cycles was the same as Lucas' and Sargent's. New classical economics has been characterized by mathematical manipulation of models fatally flawed by empirically unrealistic assumptions.