For me, the ideas in this book started in graduate school in the early 1970s as I sat in macro courses. Much of the macro I was being taught did not make intuitive sense to me; it seemed to be lacking a micro core. I took Edmund Phelps's advanced seminar on microfoundations to fill in the needed microfoundations. In that seminar Phelps was going through new work, then just coming out, on microfoundations. That work was analytically impressive, but was, for me, intuitively unsatisfying; it did not resolve my problems with macro. At that point I decided that macro wasn't for me, and that I would specialize in micro issues. I chose a dissertation topic on optimal taxation.

A strange set of events pulled me back to macro. In 1974 I was playing around in my head with wild ideas, and I came up with a scheme to create property rights in prices – letting individuals trade rights to change prices – as a way to stop inflation. I reasoned that with inflation controlled by this plan, if there was any slack in the aggregate system, expansionary demand policy would be directed into increases in real output, not inflation. It was a simple scheme, but one I found intriguing; I sent it off to my dissertation advisor, Bill Vickery. He liked it and encouraged me to develop this work into a thesis.