On the Nobel-Prize for Robert E. Hall (*1943)
and Michael Woodforts (*1955)

“This year’s laureates in the economic sciences, Robert E. Hall and Michael Woodford, have developed new macroeconomic models that have significantly improved our ability to implement effective stabilization policy. On the basis of these models, well-timed fiscal and monetary policy measures can reduce the economy’s peaks and troughs”.

_{Announcement of Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2026}

On October 12, Robert E. Hall (Stanford University/Hoover Institution) and Michael Woodford (Columbia University) were awarded the Nobel Prize in Economic Sciences. The award recognized their work on the “microeconomic foundations of macroeconomic stabilization,” but also their analyses of reshaping economic models to strengthen stabilization policies. The announcement by the prize committee elicited great satisfaction among those familiar with the work of both Americans. This may well be due to the Nobel Committee’s recent tendency to implicitly attribute almost all problems of unstable economies to the economies themselves and virtually none of these problems to flawed government policies. This trend has now been somewhat counterbalanced by the Nobel Prize given to these two scholars.

For decades on end, and especially today, governments have responded to economic crises by following the recommendations of John Maynard Keynes (1883-1946). In the 1930s, when Lord Keynes and Friedrich A. von Hayek engaged in heated academic debates about the causes of economic crises, the role of the state in overcoming them, and the function of free markets, the term ‘macroeconomics’ (Ragnar Frisch) resurfaced in the literature. Lord Keynes however must be credited for explaining the content of macroeconomics in his classic work “The General Theory of Employment, Interest and Money” (1936). According to Keynes in times of high unemployment, the state must increase aggregate demand for goods and services by increasing government spending or cutting taxes. He expected that when people would spend a certain percentage of their artificially increased income on consumption, they would lead the economy out of recession or otherwise unstable economic times. In other words, at its core, Keynes’ theory underlines the leading role of aggregate demand for goods and services output and the employment level of an economy during recessionary. He does not assume a self-correction of markets, rather, he emphasizes government intervention in the stabilization process of cycles and as an intervening agent to prevent lengthy periods of unemployment. Thus most politicians inaccurately belief that economic policy is based on simple trade-offs, such as the idea that unemployment would remain low during periods of high inflation and rise during periods of falling inflation.

Friedrich A. von Hayek (1899–1992, Nobel Prize 1974) rejected this line of reasoning. For him, economic crises are the consequence of preceding periods in which not only interest rates were driven below their natural level by an artificial expansion of credit by central banks. Thus also the cheapened money and market incompatible interventions in the labor market triggered dangerous malinvestments and capital destruction. Since these misaligned investments do not correspond to real savings or consumer preferences, the boom ultimately culminates in a downturn or recession as soon as the distorted price signals and malinvestments are liquidated. The resulting downturn is therefore a necessary structural correction to rectify malinvestments. Government attempts to stimulate the economy again thus merely prolong the imbalance. Although Hayek’s theoretical arguments prevailed, Keynes’s politically attractive theories of underinvestment and underconsumption supplanted Hayek’s theories of overinvestment and overconsumption. As a result, Keynesianism, which provided a popular justification for government intervention, became ubiquitous and once again dominates economic policy – ​​especially today.

However, subsequent prominent economists, such as Milton Friedman (Nobel Prize 1976), George Stigler (Nobel Prize 1982), Ronald Coase (Nobel Prize 1991), or Gary Becker (Nobel Prize 1992), criticized Keynes’s theories and his oversimplified economic and socio-political approach. Moreover Gottfried von Haberler (1900–1995) and many others demonstrated in the 1970s that a stagflation (a period when the global economy experienced high inflation and high unemployment simultaneously), could not be explained by Keynesian economics.

Although neither Hall nor Woodford were direct students of Milton Friedman (1912-2006), the influence of this great scholar is clearly evident. In his 1957 book, “A Theory of the Consumption Function”, Friedman argued that people wouldn’t base their consumption solely on current income but would instead consume according to what he called the “permanent income hypothesis” – in other words, their expectations of future income. Robert Hall and Michael Woodford set about developing an improved model that took into account how consumers and businesses actually made investment and consumption decisions. Hall’s work is a brilliant extension and re-examination of Friedman’s model of permanent income and consumption, which fundamentally undermined the Keynesian fiscal policy. Hall’s approach also forms the foundation for understanding the current concept of macroeconomics and shows that fiscal policy simply cannot function according to Lord Keynes’s ideas.

However, Hall’s best-known work is “The Flat Tax” co-authored with his colleague Alvin Rabushka in 1985. The flat tax is a simple and uniformly proportional income tax to which all taxpayers are equally subject and is based on proportionality, simplification, and fairness. Successfully implemented in over 40 countries, the flat tax is not only market-oriented but also adheres to the principle of equality before the law, thus standing in sharp contrast to the progressive tax is questionable from a market economy, rule of law, and democratic perspective. The Flat Tax was first published in 1985 and is still going strong and readily available (buchausgabe. de).

Michael Woodford’s main contributions are in the field of monetary policy. In particular, his seminal 2003 book “Interest and Prices” quickly became a classic in monetary theory. It is considered a standard work for central bankers. His research demonstrates that companies base their pricing decisions on their expectations regarding future interest rate developments. To this end, all central banks that set short-term interest rates should communicate clearly and credibly about the rationale behind their plans, because corporate decisions are driven by these expectations. Kevin Warsh, who has been Chairman of the US Federal Reserve since May 2026, recently responded to this insight by promising to make greater efforts to explain the Fed’s intentions in language that can be understood without an economic dictionary.

Both scholars demonstrate in their work that government intervention in monetary policy leads to errors and instability. The awarding of the Nobel Prize to Michael Woodford and Robert Hall could reignite the discussions of the late 1990s about the so-called New Keynesian economic models (whatever these may be). Many economists will celebrate their award as an undisputed success, because it shows that, unlike econometrics, a convincing macroeconomic approach is always built on microeconomic foundations.