Keynes returns: Editorial on the Nobel Prize in Economics and the changing role of the State

One way of understanding the rationale that led to this year’s Nobel Prize in Economics being awarded to R.E. Hall — from Stanford — and Michael Woodford — from Columbia — is utility. The other is timing. By highlighting the microeconomic basis of macroeconomic stabilisation — the particulars which, when done right, lead to larger improvements — Mr Hall and Mr Woodford, the Nobel citation states, have greatly improved the ability of fiscal and monetary instruments to stabilise economic headwinds. Their research has also been extremely useful for institutions, such as governments and central banks, to fireproof economies from such shocks as spikes in energy prices and changes in demands in retail. The timing of the honour is apt. The post-pandemic recovery of the global economy has been uneven, even underwhelming. And, now, wars in Ukraine and West Asia have compounded the challenges in the form of global energy crises and inflation. In the meantime, inequality, unemployment, stifled growth and the rise of the spectre of automation continue to pose challenges.

Another relevant aspect must not be overlooked. Since the 1970s, John Maynard Keynes, arguably, lost his pre-eminence as the poster boy of resolution for global economic challenges. The Keynesian model’s failure to provide a solution to a world ravaged by oil price shocks and their consequential adversarial impact on economies and unemployment, especially in the United States of America, had led to the marginalisation of Keynes’s principles. In fact, government intervention began to be seen as undesirable in the initial flush of liberalisation. But Mr Hall and Mr Woodford may have now contributed to Keynes’s resurrection. After all, at the heart of their research is the thought that the government must intervene by, to cite one example, cutting taxes and interest rates to facilitate growth during an economic slowdown, in the matters of the economy. Whether this leads to a reassessment of Keynes’s utility amidst the current economic whiplashes is something that will need to be watched. And whether the current portents on the horizon of the global economy lead to the creation of a middle ground between the spirit of Keynes and laissez-faire remains to be seen.