Friedman identiﬁed his “natural rate” as Walrasian equilibrium. Keynes’s “full employment” is also classical equilibrium: labor markets are clearing at existing real wages. Why is equilibrium unemployment not zero? Keynes and Friedman cite, but do not explain, “frictional” unemployment. They diﬀer on what explains cycles. Friedman and Lucas answer: misperceptions of inflation. Markets clear at wrong prices and quantities. Today New Classicals stress variations in the natural rate itself. In Keynesian cycles markets don’t clear. Excess supplies or demands trigger Phillips-curve movements of wages and prices. Unemployment and vacancies coexist in varying proportions because inter-sectoral shocks always occur. Adjustment dynamics, not representative-agent equilibria, determine the economy’s behavior at NAIRU and other unemployment rates. Money makes a diﬀerence, not because of money illusions or misperceptions but because adjustments begin with nominal wage and price responses.
Tobin, James, "The Natural Rate as New Classical Macroeconomics" (1993). Cowles Foundation Discussion Papers. 1304.