Keynes’s view was that recessions happen when aggregate demand falls largely as the consequence of a fall in private investment causing compacts to produce under their capacity. Producing less, firms require fewer workers, and consequently employment falls. Firms, for causes that Keynesian economists go on to debate, fail to cut wages to as low a level as job seekers will accept, and so involuntary unemployment grows. The new classical reject this step as illogical. Unintentional unemployment would present firms with a chance to raise profits by paying workers a lower wage. If firms botched to take the opportunity, then they would not be optimizing. Employed workers should not be capable to resist such wage cuts successfully since the unemployed stand ready to take their rests at the lower wage. Keynesian economics would appear, then, to rest either on market deficiencies or on irrationality, both of which Keynes denied.
These disparagements of Keynesian economics demonstrate the two fundamental tenets of the new classical macroeconomics. Primary, individuals are viewed as optimizers: given the costs, as well as wage rates, they face and the assets they hold, together with their education and training (or “human capital”), they prefer the best options obtainable. Firms maximize profits; people maximize value. Second, to a first prices adjust, approximation, varying the incentives to individuals and thereby their choices, to support quantities supplied and demanded.
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