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

The original Lucas version of the new-classical macroeconomics combined the undeniable appeal of rational expectations with two more dubious assumptions inherited from Friedman (1968), that is, continuous market clearing and imperfect information, to form the foundation of the famous “Lucas supply function” (more justly, the Friedman-Lucas supply function). Soon Sargent and Wallace (1975) extracted from Lucas’s model its implication for monetary policy, the famous “policy-ineffectiveness proposition.” The demonstration by Barro (1977) that one could interpret historical U.S. data to be consistent with the proposition and the theory brought new-classical economics to its shortlived period of peak influence.

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.

Since the late 1960s macroeconomic debates in the United States have centered on the competing interpretations of the new classical and new Keynesian macroeconomics. The initial new classical model developed in the early 1970s by Robert E. Lucas, Jr., combined market-clearing, imperfect information, and rational expectations. After much testing, it was eventually rejected in the late 1970s for failing to explain why business cycles lasted on average four years while information delays lasted only a few weeks. It was soon replaced by a second new classical approach, the Real Business Cycle (RBC) model, which was also based on continuous market clearing and competitive equilibrium, but now generated the business cycle through serially correlated procyclical technology shocks.