The 2026 Sveriges Riksbank Prize in Economic Sciences (aka the Nobel) went to Robert Hall and Michael Woodford, for their contributions to the microeconomic foundations of macroeconomic stabilization. The prize is, in many ways, a celebration of the return to pre-Keynesian macroeconomics (including the Keynes of the Treatise on Money, before the General Theory). Not much of a Keynesian revolution left in what is called New Keynesian economics, if anyone had doubts.
Woodford is perhaps the most important representative of the Neo-Wicksellian model that dominates modern macroeconomics (misnamed New Keynesianism). As I noted before, the central idea is that the monetary rate of interest, controlled by the central bank, must be adjusted to the natural rate, determined by the real forces of productivity and intertemporal preferences. I discussed the return of the natural rate of interest a decade ago, noting that Woodford was particularly prominent in its rehabilitation (after it had been largely abandoned following the Keynesian Revolution and the capital debates).
The political implications were considerable. Independent central banks, committed to price stability and capable of credibly anchoring inflation expectations, would also provide the conditions for prosperity. The so-called divine coincidence suggested that price stability would be essentially compatible with full employment (and, with a little more wishful thinking, financial stability too). Fiscal policy was relegated to a secondary role. The central bank would do the heavy lifting. Keynes, of course, had abandoned the natural rate in the General Theory, precisely because there was no reason to believe that monetary policy could guarantee full employment. But who reads that book anymore? See also my discussion of Friedman and Lucas, and why the former was more important for this counter-revolution.
Hall's contribution was central to a parallel transformation of consumption theory. His rational expectations version of Friedman's permanent income hypothesis suggested that consumption followed a random walk, responding to unexpected changes in permanent income rather than current income. This was taken as a major advance over the old Keynesian consumption function. Yet, as I discussed in a post on Duesenberry, the earlier relative income hypothesis had considerable empirical support and provided a socially grounded explanation of consumption, with important implications for income distribution and effective demand. Hall's subsequent work also found very little evidence of intertemporal substitution in consumption (rather inconvenient for the theoretical foundations of the New Keynesian IS curve).
The older structural macroeconometric tradition was also discarded, even though, as Ray Fair has argued (and I noted in my discussion of Romer's criticism of modern macro), it offered a more promising framework for studying actual macroeconomic relationships. Evidence on the importance of housing, household debt for consumption, not to mention the permanent effects of demand on output, suggests that much was lost in that transition.
It is worth remembering that even the old Neoclassical Synthesis (before the 1970s) retained important elements of the Keynesian Revolution. The Keynesian consumption function, and the relevance of income distribution for aggregate demand, remained central to macroeconomic analysis. And while the Synthesis accepted the existence of a natural rate of interest and a tendency toward full employment in the long run (at least in principle), it took seriously the imperfections and institutional obstacles that prevented the economy from getting there. The old structural macroeconometric models reflected precisely that pragmatic concern with the actual functioning of the economy. In that sense, the rational expectations counter-revolution was a step backward even from the rather limited Keynesianism of the Neoclassical Synthesis. It replaced imperfect but empirically grounded models with theoretical (supposedly elegant; whatever that means) ones grounded on individual behavior that assumed away many of the problems the older tradition tried to understand (not exactly an improvement, if the objective is to explain how capitalist economies actually work). And, perhaps more importantly, it derailed potentially more fruitful directions of research.
None of this means that Hall and Woodford made no significant contributions. They have certainly been very influential. But technical sophistication and scientific progress are not necessarily the same thing. The irony is that the “Nobel” celebrates as a revolution what was, fundamentally, a return to the ideas that the Keynesian Revolution had challenged. A counter-revolution, indeed (and one that has been remarkably successful in shaping economic policy).
