Although its name suggests a negative response of keynesian economics and a revitalization of classical economics, the newest classical macroeconomics began with Lucas’s and Leonard Rapping’s attempt to give micro bases for the Keynesian labor market.
Lucas and Rapping applied the law that symmetry in a market happens when quantity supplied equals quantity demanded. This produced to be a radical step. Because involuntary unemployment is accurately the situation in which the amount of labor supplied surpasses the amount demanded, their analysis leaves no room at all for instinctive unemployment.
Keynes’s view was that recessions happen when aggregate demand falls—largely as the consequence of a fall in private investment—causing firms to create below their capacity. Producing less, firms need fewer workers, and consequently employment falls. Firms, for reasons that Keynesian economists carry on to debate, fail to cut wages to as low a level as job seekers will accept, and as a result involuntary unemployment grows. The new classical reject this step as irrational. Involuntary unemployment would there firms with an opportunity to raise PROFITS by paying workers a lower wage. If firms failed to take the opportunity, then they would not be optimizing. Employed workers should not be capable to resist such wage cuts effectively since the unemployed stand prepared to take their places at the lower salary. Keynesian economics would come into view, then, to rest either on market flaws or on irrationality, both of which Keynes denied.
These censures of Keynesian economics exemplify the two fundamental tenets of the new classical macroeconomics. Primary, individuals are viewed as optimizers: given the costs, including wage rates, they face and the possessions they hold, counting their EDUCATION and training (or “HUMAN CAPITAL”), they decide the most excellent alternatives available. Firms maximize profits; people maximize usefulness. Second, to a first approximation, costs adjust, changing the inducements to individuals, and thereby their choices, to hold up quantities supplied and demanded.
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