Introduction

A central theme in the various contributions to this book is the dissatisfaction with the mainstream or neoclassical microfoundation of macroeconomics. This dissatisfaction concerns inter alia the use of Walrasian general equilibrium analysis as the microfoundation of macro, the reliance upon unique, stable equilibria, and the central role of the natural rate hypothesis. In the debate between the vast majority of (new) Keynesian and (new) Classical economists about macroeconomic stabilization policy, the question of the appropriateness of the underlying neoclassic microfoundation is taken for granted. In this respect, Edmund Phelps's (1994) book Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interest, and Assets is interesting for a number of reasons. To begin with, the main goal of the book is to endogenize the natural rate of unemployment, thereby dismissing the standard neoclassical assumption of an invariant natural rate. Secondly, Phelps explicitly addresses the policy implications of what he calls the structuralist theory of unemployment. In this respect, a “theory is a structuralist theory in the sense that it treats unemployment as the outcome of the configuration of real demands and supplies, the ‘structure’ of the economy in some sense” (Phelps, 1994:157). Finally, Phelps, as one of the founding fathers of the modern microfoundations debate, offers a microfoundation of this structuralist theory and claims that his theory of unemployment differs fundamentally from Keynesian as well as Classical macroeconomic approaches.