Twenty-five years ago, Edmund Phelps and Milton Friedman developed the ‘natural rate’ hypothesis. The essence of their argument was that there was such a thing as a ‘natural rate of unemployment’, that it was quite stable, and that, in the words of Phelps in his essay for this volume, it was a strong attractor of the actual rate of unemployment.

There is no denying that the natural rate hypothesis took the analysis of labour markets from the ad hocery of the Phillips curve to more solid methodological ground. But, 25 years later, one can hardly be impressed by its empirical success.

We have learned, or perhaps relearned, that:

The natural rate is at best a weak attractor. Even in the best of worlds, which in this case must mean the United States over the post-war period, the natural forces which return unemployment to normal are weak at best. Natural forces are not what have gotten us out of the recessions in the post-war US. Expansionary fiscal and monetary policies have.

The natural rate is often as much an attractee as it is an attractor. Robert Solow used to joke that the natural rate was whatever the average unemployment rate had been over the previous three years. The joke has been on Europe in the 1980s. The natural rate appears to have rejoined the actual rate all the way up. High unemployment coexists with stable inflation, a standard indicator, under the natural rate hypothesis, that Europe is now roughly at the natural rate.

These facts were, I am sure, the trigger for this volume. Some of the chapters document and reflect on the facts. Some of the chapters reflect on the underlying theory, then and now.