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"One school of thought-influential in shaping the deregulatory policies that played a role in the current crisis-argued that the competitive equilibrium approach of microeconomics provided the correct foundations for macroeconomics. This school, based on the neoclassical model, was sometimes referred to as the "New Classical" school, or the "Chicago School," because some of its high priests taught at the University of Chicago. Because they believed that markets are always efficient, they contended that one should not be worried about economic fluctuations, such as the current recession-it was simply the efficient adjustment of the economy to shocks (such as changes in technology) coming from the outside. It was an approach that had strong policy prescriptions-a minimal role for government.

''Thought they based their analyses on the neoclassical (Walrasian) models, they made a further simplification that all individuals were identical. This was called the "representative agent" model. But if all individuals are identical, there can be no borrowing or lending-that would simply be moving money from the left pocket to the right pocket. There can be no bankruptcy. While I argued earlier that problems of imperfect information are central to an understanding of modern economics, in their models there can be no information asymmetries, where one person knows something that someone else doesn't. Any information asymmetry would reflect intense schizophrenia, hardly consistent with their other assumptions of full rationality. Their models have nothing to say about the critical issues that are at play in the current crisis: so what if one gives the bankers an extra trillion dollars or two? In the model, the bankers and the workers are the same people. Key policy debates were simply assumed away. For instance, the representative agent model precludes any discussion of distribution. In a sense, views of values (including the view that the distribution of income is not important) are embedded in the very formulation of their analyses."''


 * &mdash;Joseph Stiglitz, Freefall, 2010

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