Editing Keynesian economics (section)

===New classical===
{{Main|New classical macroeconomics}}
{{See also|Lucas critique}}
Another influential school of thought was based on the [[Lucas critique]] of Keynesian economics. This called for greater consistency with [[microeconomic]] theory based on [[rational choice theory]], and in particular emphasized the idea of [[rational expectations]]. Lucas and others argued that Keynesian economics required remarkably foolish and short-sighted behaviour from people, which totally contradicted the economic understanding of their behaviour at a micro level. [[New classical economics]] introduced a set of macroeconomic theories that were based on optimizing [[microfoundations|microeconomic]] behaviour. These models have been developed into the [[real business-cycle theory]], which argues that business cycle fluctuations can to a large extent be accounted for by real (in contrast to nominal) shocks.

Beginning in the late 1950s new classical macroeconomists began to disagree with the methodology employed by Keynes and his successors. Keynesians emphasized the dependence of consumption on disposable income and, also, of investment on current profits and current cash flow. In addition, Keynesians posited a [[Phillips curve]] that tied nominal wage inflation to unemployment rate. To support these theories, Keynesians typically traced the logical foundations of their model (using introspection) and supported their assumptions with statistical evidence.<ref name="Akerloff2007">{{cite journal|last=Akerlof|first=George A.|author-link=George Akerlof|year=2007|title=The Missing Motivation in Macroeconomics|url=http://pdfs.semanticscholar.org/66b9/4ca46f30e2fd969232d8d847cd486328b5a0.pdf|archive-url=https://web.archive.org/web/20200803000325/http://pdfs.semanticscholar.org/66b9/4ca46f30e2fd969232d8d847cd486328b5a0.pdf|url-status=dead|archive-date=3 August 2020|journal=American Economic Review|volume=97|issue=1|pages=5–36|doi=10.1257/aer.97.1.5|s2cid=55652693}}</ref> New classical theorists demanded that macroeconomics be grounded on the same foundations as microeconomic theory, profit-maximizing firms and rational, utility-maximizing consumers.<ref name="Akerloff2007" />

The result of this shift in methodology produced several important divergences from Keynesian macroeconomics:<ref name="Akerloff2007" />
# Independence of consumption and current income (life-cycle [[permanent income hypothesis]])
# Irrelevance of current profits to investment ([[Modigliani–Miller theorem]])
# Long run independence of inflation and unemployment ([[natural rate of unemployment]])
# The inability of monetary policy to stabilize output ([[rational expectations]])
# Irrelevance of taxes and budget deficits to consumption ([[Ricardian equivalence]])