The so-called marginal revolution that occurred in Europe in the late 19th century, led by Carl Menger, William Stanley Jevons, and Léon Walras, gave rise to what is known as neoclassical economics.
The Post-World War II period saw the widespread implementation of Keynesian economic policy in the United States and Western European countries.
Its dominance in the field by the 1970s was best reflected by the controversial statement attributed to US President Richard Nixon and economist Milton Friedman: "We are all Keynesians now".
The nascent classical economists attributed the blame to Keynesian policy responses for the continued unemployment, high inflation and stagnant economic growth—stagflation.
New Classical and monetarist criticisms led by Robert Lucas, Jr. and Milton Friedman respectively forced a labored rethinking of Keynesian economics.
At any one time, the economy is assumed to have a unique equilibrium at full employment or potential output achieved through price and wage adjustment.
Such models have received severe neoclassical criticism, pointing to the disjuncture between microeconomic behavior and macroeconomic results, as indicated by Alan Kirman.
Additionally, the model's key result that only unexpected changes in money can affect the business cycle and unemployment did not stand empirical tests.
[18] The new classical macroeconomics contributed the rational expectations hypothesis and the idea of intertemporal optimisation to new Keynesian economics and the new neoclassical synthesis.