Adam Smith published The Wealth of Nations in 1776. This event marked the birth of classical economics as a modern school of thought with the central idea that markets can self-correct.
Carl Menger, William Stanley Jevons, and Léon Walras led the marginal revolution in Europe during the late 19th century. Alfred Marshall later formalized these neoclassical formulations into mathematical endeavors.
The New Classical school emerged in the 1970s as a response to perceived failures of Keynesian economics following the 1973 oil crisis. Robert Lucas Jr. designed the Lucas critique primarily to cast doubt on the Keynesian model while Monetarist criticisms led by Milton Friedman contributed to this shift.
New classical economists utilize three diagnostic sources called wedges to measure fluctuations in growth including productivity, capital, and labor wedges. These wedges function as distortionary taxes within the economy to identify specific causes behind economic downturns through business cycle accounting.
Edward C. Prescott and Finn E. Kydland developed the real business cycle model which relies on changes in technology to explain fluctuations in economic output. This theory suggests that supply-side disturbances drive business cycles rather than market failures or demand-side factors.