Introducing ‘The Theory of New Classical Macroeconomics’

The Theory of New Classical Macroeconomics‘ is a comprehensive assessment of the well-known new classical and monetarist doctrines. By writing this book I tried to answer those challenges which tend to take mainstream economics highly irrelevant and completely useless with regard to everyday economic policy problems and the common efforts to understand reality. In other words, this is all about the positive and negative heuristics suggested by Imre Lakatos: how to find the proper scientific area for new classical macroeconomics where it can be effectively defended and how to find an area where we are not justified to use this theory as an instrument if analysis.

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This assessment is carried out at two levels. First, mainly in Chapter 1, I tried to outline and to comment the ongoing debate between the realist and the anti-realist positions. To be honest, I argue for the realist standpoint throughout the book. In order to do so, I look into the method of building theories in mainstream economics in detail. For me, creating the concepts of new classical macroeconomics consists of two steps: one should abstract from some aspects of everyday life of man, for example norms and values, which make man a social being and then the remaining aspects of human life, i.e. the functioning of the economic man, should be idealized (exaggerated to extremity) in order to make them the only guiding principle of behaviour. This is the way how homo oeconomicus was created–and he is the creature who populates the Lucasian islands. It is asserted that new classical macroeconomics is a realist theory because its concepts and the fundamental economic laws and mechanisms it grabs are all linked to our socio-economic reality. In this respect, mainstream economics is not taken unique and homogenous, since, as it is argued, Milton Friedman in his seminal paper on the method of positive economics (often mentioned as F53) outlined an instrumentalist methodology (which even he himself could not always insist on) which was definitely not followed by the new classical economists.

Second, the monetary and fiscal theory and economic policy recommendations of new classical macroeconomics are reviewed in detail. The greatest emphasis is on the Phillips curve which was somehow the common language of 20th century high theory. A definite distinction is drawn between the Friedmanian and the new classical Phillips curves in order to show how the methodological principles shaped the theories. By studying the equivalence theorem I conclude that the new classical doctrines are all of conditional nature. One should not ignore the presumptions on which these doctrines were built (i.e. from which they were deduced). When analyzing the Ricardian equivalence and the role of unexpected economic policy actions I had to realize that emphasizing a strong opposition between the theory of Keynes and new classical macroeconomics is a huge mistake. New classicals never asserted the complete ineffectiveness of activist economic policies, only pointed out and specified the exact conditions and circumstances which are necessary to this policy ineffectiveness. For example, if expectations are fully rational, prices are flexible, and macroeconomic shocks are white noises, then (and only then) economic policy interventions turn out to be completely useless. But, on the contrary, if any if these presumptions cannot be maintained under the actual conditions of our socio-economic reality, then activist (Keynesian-style) economic policy steps are effective again. And this is my main point: new classicals do not predestine countercyclical economic policies to failure, they just call our attention to the conditions which are needed to establish this ineffectiveness. There are circumstances under which activist economic policy is completely useless, but, necessarily, there circumstances under which it is not so.

In this book I have taken the position that it is time for us to reconsider the relevance of new classical macroeconomics in understanding socio-economic reality and in governing our economic policies. By using the new classical principles, I believe, one will have new methods and new aspects to make economic policy interventions more effective. The Keynesian way of economic policy is not dead, only its conditions got specified further.

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