New-classical economics has been undeniably influential, but not in the way that its three prominent creators originally imagined. Its most important… - Robert J. Gordon

This theme of mismeasurement interacts with the designation of the one hundred years between 1870 and 1970 as the “special century.” Measurement errors are greatest in the early years, both in the scope of the standard of living and in the extent of price index bias. Clearly the welfare benefits to consumers in the categories of life entirely omitted from GDP were greatest long ago: the transition from the scrub board to the automatic washing machine was a more important contributor to consumer welfare than the shift from manual to electronic washing machine controls or from a twelve-pound tub to an eighteen pound tub. The most important unmeasured benefit of all, the extension of life expectancy, occurred much more rapidly from 1890 to 1950 than afterward.

During the relatively brief period in the late 1960s when economists were pondering the possible obsolescence of business cycles, the scholarly discipline of macroeconomics showed signs of becoming fragmented into speciality areas devoted to components of the then popular large-scale econometric models-for example, consumption, investment, money demand, and the Phillips curve. But more recently the revival of severe real world business cycles, together with the revolutions associated with Milton Friedman's monetarism and Lucas's classical equilibrium models, has brought about a revival of interest in economic analysis that focuses on a few broad aggregates summarizing activity in the economy as a whole-nominal and real income, the inflation rate, and the unemployment rate.

Part of the downfall came early and on theoretical grounds, with the realization that real-world information lags for aggregate variables like the price level and money supply were much too short to rationalize the persistent multiyear deviations from equilibrium that seemed to characterize business cycles in most industrialized countries. The second dubious assumption, continuous market clearing, was viewed more critically once it was recognized that it was not an inextricable concomitant of rational expectations, especially when Stanley Fischer (1977) and Edmund Phelps and John Taylor (1977) showed that rational expectations could be embedded in a model containing real-world institutional features like multiperiod wage and price contracts to generate nonmarket-clearing behavior. Once Fischer and Phelps-Taylor had shown that rational expectations by itself was a necessary but not a sufficient condition to validate new-classical policy conclusions, the race was on to develop the new-Keynesian theory based on rational expectations and one or another institutional impediment to continuous market clearing.