New Classical economics grew out of Monetarism during the mid-1970's, their distinguishing feature being the "rational expectations hypothesis". New Classical analysis is also based on the assumption of clearing markets, the natural rate hypothesis, and the nature of the aggregate supply curve.
K. Alec Chrystal and Simon Price, "Controversies in Macroeconomics", on New Classical macroeconomics
"For the new Classical economist the economy is made up of actors who consistently pursue the maximization of some clearly-defined objective function. The actors trade with one another in well-organized markets. Trade takes place at market-clearing prices such that all who wish to trade at the going price are able to do so. This far, the framework would be recognized by a Classical economist. Novelty arises from the fat that the New Classical economist will not locate these actors in a static world, but rather in a stochastic environment. The world is one in which there are recurrent shocks to the system--bad harvests, earthquakes, sunspots, policy shifts, exogenous taste changes, wars, etc. In other words, while actors are rationally trying to respond to the price signals of the market, these signals are "noisy". The fact that they are noisy has important implications. The New Classical world is often characterized as being "perfect" in the sense of full information and costless adjustment. Some new Classical models are like this, but these are not the interesting ones. It is central to the New Classical explanations of macroeconomic fluctuations that information is incomplete and that some adjustments are costly--that is, prior commitments are recurrently made.An individual does not wait to find out the complete set of prices and then make all the supply/demand decisions at those actual prices (as might be the case in the presence of a Walrasian auctioneer). Rather, some decisions have to be made before the price which would effect it has actually been determined. For example, a wage contract may be entered into before work begins and a factory must be built before it can produce. These commitments must be made on the basis of the expectations of what the relevant prices will be, but it is to be emphasized that these expectations can, and will in general, be incorrect because the actual outcome is affected by current disturbances.
The rational expectations hypothesis simply amounts to the assumption that, in forming their expectations of what these prices (and perhaps other variables) will be, actors do the best they can. This means that, given the information available at the time the forecast is made, no better forecast could be made on the basis of the same information. This does not imply either that the rational forecast will be correct or that some other guess would not be better for specific episodes. What it does imply is that a "rational" forecast will, on average, be correct and that no other forecasting technique will regularly beat it. If the rational forecast was not correct on average, such systematic error would imply that information was not being fully utilized. This would contradict the notion of rationality. Equally, if there was a way of making forecasts better on average, that information should be included in the rational forecast....
A useful way to think of the difference between Keynesian and new Classical perceptions of policy is to notice that a Keynesian would consider the policy-maker to be exogenous to the economy, and so all policies would be unanticipated. In the New Classical view, however, to the extent that the policy-maker responds systematically to the state of the economy, actors learn that this is what they will do and change their own behavior accordingly. More fundamentally, perhaps, it means that the behavior of the economy will differ with each policy regime."
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