Quantitative Evaluation of Idealized Models in the New Classical Macroeconomics

The new classical macroeconomics is today certainly the most coherent, if not the dominant, school of macroeconomic thought. The pivotal document in its two decades of development is Robert Lucas’s 1976 paper, “Econometric Policy Evaluation: A Critique.” Lucas argued against the then reigning methods of evaluating the quantitative effects of economic policies on the grounds that the models used to conduct policy evaluation were not themselves invariant with respect to changes in policy. In the face of the Lucas critique, the new classical economics is divided in its view of how to conduct quantitative policy analysis between those who take the critique as a call for better methods of employing theoretical knowledge in the direct empirical estimation of macroeconomic models, and those who believe that it shows that estimation is hopeless and that quantitative assessment must be conducted using idealized models. Assessing the soundness of the views of the latter camp is the main focus of this essay.