Medicine for black swans. What the Nobel Prize in Economics was awarded for this year

Strictly speaking, Alfred Nobel did not create the economics prize. That is why the Royal Swedish Academy of Sciences, together with Sweden’s central bank, awards the Nobel Prize for contributions to economics. This year it was awarded to American scientists Michael Woodford and Robert Hall. Both are alumni of the Massachusetts Institute of Technology (MIT). Robert Hall is a professor of economics at Stanford, and Michael Woodford is at Columbia University.

As stated in the Nobel Committee’s announcement, the prize was awarded this year “for microeconomic foundations of macroeconomic stabilization”. “The laureates’ work has given us a solid theoretical foundation for models now used by central banks and governments around the world. Thanks to them, we are better prepared for economic shocks such as energy crises or sudden changes in consumer behavior”, said John Hassler, chair of the Prize Committee in Economic Sciences.

The prize was awarded to Woodford and Zoll for studying the following problem: why do macroeconomic measures such as the central bank’s key interest rate and government stimulus not always work during crises?

It has long been known that the economy moves cyclically — a rise is followed by a decline and then another rise. Cycles of different lengths, the features of their overlap, and so on have been discovered and studied. Since the time of John Maynard Keynes, it has been known that governments cannot eliminate the cyclical nature of the economy, but they can smooth out the “waves”. This is usually done by changing the country’s central bank rate and through government measures: the central bank raises the key rate during an overheating economy, making money more expensive, and lowers it during a downturn, while the finance ministry injects money into the economy during a downturn and withdraws it from there, reducing liquidity, during overheating.

However, already in the 1970s, during the oil crisis in the United States, this model broke down. An attempt to stimulate the economy, which had suffered from the oil shock, led only to inflation taking off. Economic growth remained weak, and the United States suffered for a long time from stagflation, which was cured at too high a cost: the Federal Reserve raised rates to 20%, costing then-President Jimmy Carter a second term. In fact, that was when the research of the Nobel laureates began, leading to the conclusion that

the “treatment” of the economy is influenced not only by macroeconomic factors such as monetary policy and government stimulus, but also by microeconomic ones — in particular, the expectations of businesses and people.

In fact, since then, business expectations indices (for business activity and prices) and public expectations (inflation expectations) have been taken into account by government economic agencies alongside inflation, labor market data, and GDP growth. Moreover, it became clear that regulators have a powerful weapon in their arsenal: verbal intervention. By saying what they think about the economy and what actions they are ready to take, central banks and financial authorities can change the mood of businesses and citizens, and with it their actions, which in turn affects the economy.

This is where the practice comes from of Federal Reserve chairs either speaking very clearly or very vaguely, or, like the current chair Kevin Warsh, not saying anything at all, claiming that the Fed now follows the market. Which, incidentally, creates the nervousness that can be observed in real time. This is also where the famous brooches of Elvira Nabiullina, head of Russia’s central bank, come from — they disappeared with the start of the war (but at the press conference after the central bank meeting, she then appeared in mourning black).

Woodford’s and Hall’s research has not become a panacea for sudden crises for governments. They still handle cyclical downturns and overheating fairly well, but not “black swans” — sudden economic shocks — very well. One need only recall the “helicopter money” of the COVID era: having failed to raise rates in time, the Fed today is forced to steer between a dangerously overheated economy (the U.S. stock market is being carried only by the AI sector), stubborn inflation, and the danger of an economic shock if the Fed’s money-fueled bubble bursts without proper control. The same situation exists in Russia: inflated by budget injections into the military sector in 2023–24, the Russian economy today suffers from both a crisis in the civilian sector and inflation, as well as pessimistic expectations among businesses and citizens. The economic situation in Japan, China, and the European Union is difficult...

So was the “Nobel” awarded in vain? No. The situation is difficult, but there has been no crisis collapse anywhere yet, although it has been expected for several years now. Regulators have learned to smooth even economic shocks — though this comes at the cost of longer “bad times”. Miracles do not happen: either fast and painful — or long and tedious.

It is also interesting to observe how the Nobel Prize in Economics becomes an exact reflection of the current agenda.

In last year, for example, the award went to Joel Mokyr, Philippe Aghion, and Peter Howitt, who explained how innovation and technological progress help society grow wealthier. And it is worth remembering that it was last year that the AI revolution began its triumphant march across the world, and technocrats became leaders of the elite — and of wealth. A year earlier, the prize went to Daron Acemoglu, James Robinson, and Simon Johnson, who explained why some countries grow rich while others remain trapped in poverty — and then the widening gap between such countries became especially worrying to the world.

Perhaps, from the standpoint of “pure art”, this is wrong — to award a prize according to current relevance. But from a practical standpoint, it is a very wise decision: awarding this prize has always drawn attention to the laureates’ ideas. And practicality is the most important thing in economics.