Robert E. Hall, Michael Woodford Win 2026 Economics Nobel

Macroeconomics grew as a separate field of study after the Great Depression (1929-39). During this time, output and jobs fell sharply across Europe and North America. In the United States, the unemployment rate rose from about 3% to 25% within a few years. Before this crisis, most economists believed that free markets fix themselves. They thought unemployment could not stay high for long. The British economist John Maynard Keynes disagreed. In his 1936 book, The General Theory of Employment, Interest and Money, he presented a new idea. He argued that total spending in an economy, called aggregate demand, does not always match what the economy can produce. When demand falls short, governments and central banks can help. They can increase spending or cut interest rates to support the economy. This idea became the foundation of stabilisation policy. Stabilisation policy uses fiscal and monetary tools to reduce ups and downs in growth and jobs.

Early Keynesian models assumed that the statistical links between variables like inflation, consumption and unemployment stayed fixed over time. This assumption failed during the oil-price shocks of the 1970s. These shocks caused stagflation: slow growth, high unemployment and high inflation together. In 1976, economist Robert Lucas pointed out a key problem. Lucas later won the Nobel Prize in 1995. He argued that people change their behaviour when they expect a policy, which alters the very relationships policymakers relied on. This weakens the policy's effect. This became known as the Lucas critique. It pushed economists to build models starting from how individual households and firms actually decide to spend, save and set prices. They stopped relying only on fixed statistical averages.