Most people view macroeconomics as a result of the mechanical tweaking of some variables to alter other variables. For example, if aggregate consumer demand is down, there is immediately a call for lower interest rates and higher government doles. Similarly, when demand outstrips supply, then the call is the opposite: raise interest rates and cut back on handouts.

There was also a long-held belief that unemployment and inflation had an inverse relationship — as shown in the famous Phillips Curve — and that income and consumption moved in tandem. If governments could tweak one, the belief was that this would result in changes in the other.

It was this that Robert E. Hall and Michael Woodford turned on its head, for which they were awarded the 2026 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, commonly called the Economics Nobel.

The need for new thought

The economic thinking that the ‘invisible hand’ of the government should step in to stabilise the economy was born out of the landmark work of that titan of economic theory, John Maynard Keynes, and was put to great use in the aftermath of the Great Depression in the U.S. in the 1930s.

This stabilisation policy remained popular for several decades until it was upended by the oil shock the U.S. economy faced in the 1970s. During this crisis, the relationship between several macroeconomic variables broke down. That is, inflation rose at an accelerated pace even though unemployment was high, and the link between income and consumption looked like it was no longer holding.

What this meant was that conventional stabilisation policy no longer worked — government stimulus came at the wrong time, which had long-term detrimental effects on growth and inflation.

Economists such as Robert E. Lucas, the 1995 Economics Nobel Prize winner, then got to work to show that the dry mechanisms of simply working with macroeconomic variables were not the way. Inflation at the macro level was the result of pricing decisions by thousands of individual companies, and total private consumption was the result of actions taken by lakhs of individual households.

The ‘human’ element to macroeconomics

However, while it was increasingly accepted that households make consumption choices not only on the basis of their current situation but also on the basis of their future expectations, the difficulty arose in trying to quantify the effect of these future expectations.

Enter Robert E. Hall. Born in 1943 in Palo Alto, California, Mr. Hall graduated from UC Berkeley in 1964 and earned his PhD from MIT. Even as a graduate student, he was already working on the issue of how government policy affects business behavior, research that eventually led to a seminal 1967 paper ‘Tax Policy and Investment Behavior’.

He went on to serve on the economics faculty of UC Berkeley from 1967 to 1970 before moving to MIT and then to Stanford University, where he still works as the Robert and Carole McNeil Joint Hoover Senior Fellow and Professor of Economics.

Mr. Hall’s greatest contribution, and for which he was awarded the Nobel Prize, however, had to do with the households not companies.

The central idea of his research, later put down in a landmark paper in 1978, was that if the consumption decisions of households is governed by their expectations of future income and other such factors, then their current consumption is also an accurate indi­cator of their future expectations. That is, if a household is optimistic about the future, it will consume more than if it were pessimistic.

A related observation was that households will also only ever change their consumption patterns if their assessment of the future changes. In turn, their assessment of the future changes when they obtain new and relevant information. Further, since new information cannot be predicted by definition, changes in consumption also cannot be predicted.

Now, here is the key for policymakers. If the rule is that changes in consumption cannot be predicted because they are based on unpredictable new information, then situations where it can be predicted must be because households are breaking this rule.

This breaking of the rules usually takes place when a household is living paycheck to paycheck, or hand-to-mouth. They cannot borrow and have no savings, and so they spend only exactly what they earn. That is, their consumption is entirely predictable.

Using this finding, and the empirical work done by Mr. Hall, policymakers could now measure in exact terms the percentage of the population that was living hand-to-mouth.

This insight, that some households are forward-looking while others cannot be, has become an important element of the macroeconomic models used by central banks and governments around the world.

The other major contribution of Mr. Hall’s work was bringing in a ‘human’ element to macroeconomics, providing policymakers a map of sorts to how individuals react to both fear and confidence about the future.

Why companies behave the way they do

Mr Hall’s work addressed the demand side, giving macroeconomics microeconomic underpinnings. The supply side theory was a result of the work done by Michael Woodford.

Mr. Woodford was born in 1955 in Massachusetts and he went on to complete his undergraduate studies at the University of Chicago, earn a Juris Doctor from Yale Law School, and complete his PhD in Economics from MIT.

Not only did Mr Woodford build on Mr Hall’s demand side contributions, but he also brought about a decisive change in how inflation was viewed. That is, in a series of papers starting in the 1990s, he showed that inflation is based on the behaviour of individual companies that set prices, knowing that it would be too difficult to change these prices every time demand or input costs change.

Firms are not only future-looking in their behaviour, but their prices also tend to be ‘sticky’ — they don’t change quickly.

Now, the follow-up of this for policymakers was that, since businesses look to the future, their expectations about future interest rates are very important to manage inflation. As a result, it becomes of prime importance for central bank policies to be credible and transparent.

That is why the RBI Governor, while announcing interest rate decisions, put them in the context of the global and Indian economies, and gives the rationale and outlook in detail. This policy of transparency is followed by all major central banks around the world and has its foundations in Mr. Woodford’s work.

Other aspects of Mr. Woodford’s work also provided policymakers more effective tools to deal with supply shocks than they had during the 1970s, such as using monetary policy to do the job rather than fiscal policy.

Mr. Woodford combined all of this with Mr. Hall’s demand side theory and created a complete framework, which he published in a 2003 monograph titled Making Things Happen: A Theory of Causal Explanation. This monograph laid the groundwork for understanding business cycles, what causes them, how they play out, their impact on stabilisation policy, and the importance of policy transparency.

In essence, the two economists provided the theoretical and empirical underpinnings to a basic but powerful idea for policymakers: the economy is made out of the people in it.

The 2026 Nobel Prize for Economics has been jointly awarded to American economists Robert E. Hall and Michael Woodford for providing an empirical foundation for determining how governments should incorporate the demand behaviour of households and the supply and pricing behaviour of companies when devising policies to stabilise the economy.

According to the citation of the 2026 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, commonly called the Economics Nobel, the two economists were awarded the prize for establishing the “microeconomic foundations of macroeconomic stabilisation”. 

The research done by Mr. Hall and Mr. Woodford also provides an empirical basis, as Mr. Woodford himself explained on Monday, for the idea that the effectiveness of economic policy is also determined by how well the government communicates why it is implementing those policies. 

Mr. Hall is currently the Robert and Carole McNeil Joint Hoover Senior Fellow and Professor of Economics at Stanford University while Mr. Woodford is the John Bates Clark Professor of Political Economy at Columbia University.

Nobel Prize 2026 Winners | Full List

Why stabilisation needed a change

Stabilisation policy loosely captures the various instruments and steps governments use to control wild swings in growth, output, inflation, unemployment and business cycles. 

Through most of the 20th century, the theories of theoretical economic titan John Maynard Keynes held sway, that government policy must step in to stabilise the economy. That is, demand can be boosted through loose monetary policy and increased transfers from governments to households while excess demand can be reined in by tightening such policies. 

However, the experience of the U.S. economy in the 1970s showed that this framework was not enough. The attempts by the U.S. government and Federal Reserve to tame inflation and unemployment led to high unemployment and high and accelerated inflation. 

Stabilisation policy as a whole came under pressure and some argued it should be abandoned entirely. Mr. Hall and subsequently Mr. Woodford rebuilt this framework. 

How households consume

Mr. Hall worked on the demand side and provided an understanding of consumption demand. 

The earlier system had assumed a mechanical relationship between aggregate disposable income and aggregate consumption demand. That is, the assumption was that consumption had a direct relationship with higher or lower levels of disposable income. 

Mr. Hall found that, while current disposable income matters, expectations about the future path of matters almost as much. That is, if a household is expecting future constraints, this will affect its current spending. 

In a paper in 1978, Mr. Hall brought empirical backing to this idea and substantially changed the way consumption theories could be quantified.

How companies set prices

Mr. Woodford, on the other hand, focused on supply, particularly firms and how they set prices, and combined both his work and Mr. Hall’s into a composite. 

In a series of papers starting in the 1990s, Mr. Woodford showed that prices set by firms do not adjust on a continuous basis. Instead, firms set the price for a period of time. For example, the price of ice-cream is set at the start of summer and not changed through the season. 

Understanding this brought an element of ‘forward-lookingness’ into the supply side. That is, if prices are going to be set for a period of time, companies need to understand what that period of time is going to look like. 

Mr. Woodford succeeded in deriving a formula from this theory for how aggregate inflation relates to expectations and current levels of output, and combined this with Mr. Hall’s theory of demand. 

He laid out the full framework in a 2003 monograph titled Making Things Happen: A Theory of Causal Explanation. It laid the groundwork for understanding business cycles, what causes them, how they play out, the impact of these on stabilisation policy, and delivered key insights such as the importance of policy transparency. 

Why transparency is important

“One of the themes in my work is that government authorities shouldn’t view stabilisation of the economy as an exercise that is simply conducted by people pulling levers to control the economy independently of what people in the economy understand about this,” Mr. Woodford said on Monday during the press conference announcing the Nobel results. 

He explained that his work has stressed that the understanding of consumers of what policy is likely to be like in the future is “crucial” to the effects of policy.

“And so, creating a framework that allows governments to talk to the public about what they’re doing, I think is also important,” Mr. Woodford said. “And that was one of the key goals of trying to develop an analytical framework, not simply to use it on people, but to also talk to people about why the things that are being done are being done.”

Published – October 12, 2026 06:05 pm IST

Stockholm:

The Nobel Prize in Economics was awarded on Monday to Turkish-American Daron Acemoglu and British-Americans Simon Johnson and James Robinson for research into wealth inequality between nations.

By examining the various political and economic systems introduced by European colonisers, the three have been able to demonstrate a relationship between institutions and prosperity, the jury said.

“Reducing the vast differences in income between countries is one of our time’s greatest challenges,” Jakob Svensson, chair of the Committee for the Prize in Economic Sciences, said in a statement.

“The laureates have demonstrated the importance of societal institutions for achieving this,” Svensson added.

Acemoglu, 57, is a professor at the Massachusetts Institute of Technology (MIT), as is Johnson, 61.

Robinson, 64, is a professor at the University of Chicago. 

The jury highlighted the laureates’ work illuminating how societal institutions play a role in explaining why some countries prosper, while others do not.

“I am delighted. It’s just a real shock and amazing news,” Acemoglu told reporters via telephone as the award was announced in Stockholm.

The Economics prize is the only Nobel not among the original five created in the will of Swedish scientist Alfred Nobel, who died in 1896.

It was instead created through a donation from the Swedish central bank in 1968, leading detractors to dub it “a false Nobel”.

However, like for the other Nobel science prizes, the Royal Swedish Academy of Sciences decides the winner and follows the same selection process.

The Economics Prize wraps up this year’s Nobel season, which honoured achievements in artificial intelligence for the physics and chemistry prizes, while the Peace Prize went to Japanese group Nihon Hidankyo, committed to fighting nuclear weapons.

South Korea’s Han Kan won the literature prize — the only woman laureate so far this year — while the medicine prize lauded discoveries in understanding gene regulation.

The Nobel Prizes consist of a diploma, a gold medal and a one-million-dollar sum. 

They will be presented at ceremonies in Stockholm and Oslo on December 10, the anniversary of the 1896 death of scientist and prize creator Alfred Nobel.

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