By Dr Frank Shostak
The Nobel prize in economics for 2026 was awarded to Robert E. Hall and Michael Woodford. According to the Nobel committee, the laureates had developed macroeconomic models that significantly improved our ability to implement effective stabilization policies. The committee is of the view that on the basis of these models, well-timed fiscal and monetary policy measures can reduce the economy’s peaks and troughs.
The models developed by the laureates are based on the ideas of English economist John Maynard Keynes. In the Keynesian framework, the output that an economy can generate with a given pool of resources i.e. labour, tools and machinery, and a given technology without causing inflation, is labelled as potential output.
If for whatever reasons the demand for the produced goods is not strong enough this leads to an economic slump. (Inadequate demand for goods leads to only a partial use of existent labour and capital goods).
It is then the role of government and central bank policies to close the gap between the potential output and the actual output.
Note again, for Keynesian economics, an economic slump is the result of inadequate demand. Hence, it is the role of the government and the central bank to strengthen overall demand.
Keynes suggested that peaks and troughs can be evened out by stimulating demand (accelerating) when it is too low and slowing it (braking) when it is too high.
Boom-bust cycles and the central bank
For the Nobel Laureates, similarly to Keynes, boom-bust economic cycles are about the strength of the economy. However, rather than looking at the gap between potential and actual output the Nobel laureates have utilised the real business cycle model (RBC) to explain boom-bust cycles. On this view a major cause behind economic boom-bust cycles is technological shocks. A positive technology shock implies that with a given supply of capital and labor, the economy could generate more output. A recession is caused by a negative technology shock that leads to a fall in output i.e. to an economic bust.
Following Mises and Rothbard contrary to the Nobel laureates, an economic boom is not about an economic prosperity and wealth generation, but about the diversion of resources from the wealth generating activities towards activities that consume and do not produce wealth i.e. undermine the wealth generating process.
If for some reason the diversion of resources is arrested, various non-productive activities that sprang up as a result of this diversion come under pressure i.e. an economic bust emerges.
Therefore, what is required in order to establish how boom-bust cycles are formed is to identify the cause that gives rise to the diversion of resources from wealth generators to non-wealth generators.
Central Bank policies the key factor behind boom-bust cycles
In a free, unhampered market, we could envisage that the economy would be subject to various shocks but it is difficult to envisage a phenomenon of regular boom-bust cycles.
According to Rothbard,
Before the Industrial Revolution in approximately the late 18th century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subjects; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions.
The boom-bust cycle phenomenon is somehow linked to the modern world. Careful examination would reveal that the link is the modern banking system, which is coordinated by the central bank.
Whenever the central bank adopts an expansionary monetary stance, it sets in motion exchanges of nothing for something as a result of the newly generated money out of “thin air”. It is this that sets the diversion of wealth from wealth producers to the holders of the newly generated money out of “thin air”. The emergence of activities on the back of the central bank’s expansionary monetary stance gives rise to a false economic prosperity labelled an economic boom. The expansionary monetary stance results in the economic impoverishment of wealth producers.
Once the central bank tightens its monetary stance, the diversion of resources towards activities that emerged on the back of the central bank’s previous expansionary monetary stance is stopped. This in turn leads to their demise, or what is called to an economic bust.
The heart therefore of what business cycles are is the process of the diversion of resources from wealth generating activities towards non-wealth generating activities. This process is set by the monetary policies of the central bank.
The idea of employing a model in order to establish policies to stabilize the economy is questionable. A policy of tampering with the economy leads to a weakening in the wealth generation process and generates economic impoverishment. Stabilization policies that are going to be prescribed by the macro models are another form of tampering with the economy.
The importance of the subsistence fund
Now, what drives economic growth is not only the existing stock of capital goods and the pool of labour, but also the subsistence fund that maintains individuals’ life and well being. On this, Richard von Strigl wrote:
Let us assume that in some country production must be completely rebuilt. The only factors of production available to the population besides labourers are those factors of production provided by nature. Now, if production is to be carried out by a roundabout method, let us assume of one year’s duration, then it is self-evident that production can only begin if, in addition to these originary factors of production, a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year……..The greater this fund, the longer is the roundabout factor of production that can be undertaken, and the greater the output will be.
An expanding subsistence fund supports government activities and activities that sprang up on the back of an expansionary monetary policy whilst still permitting a positive growth rate in the activities of wealth generators.
If, however, the subsistence fund is declining then regardless of any increase in government outlays and the monetary pumping by the central bank, overall economic activity cannot be revived.
Note that expansionary fiscal and monetary policies do not rescue the economy, but rescue activities that the economy cannot afford. It sustains waste and promotes inefficiency, draining resources from growth and efficiency.
Allowing the market to do the allocation promotes prosperity
According to Keynesian thinking, one cannot have complete trust in a market economy, which is seen as inherently unstable. Hence there is the need for governments and central banks to manage the economy. We suggest that allowing the market to do the allocation of resources leads to better results.
Even the founder of the Soviet Union, Vladimir Lenin, understood this when he introduced the market mechanism for a brief period in March 1921 to restore the supply of goods and prevent the economic catastrophe.
Contrary to popular thinking i.e. Keynesian ideas, we suggest that the best economic policy for the central bank and the government is to do as soon as possible nothing. By doing nothing the government and the central bank will enable wealth generators to accumulate savings thus strengthening the subsistence fund. This in turn is going to raise individuals living standards.
Conclusion
The Nobel prize in economics for 2026 was awarded to Robert E. Hall and Michael Woodford. According to the Nobel committee, the laureates developed macroeconomic models based on the ideas of John Maynard Keynes, that have improved our ability to implement effective stabilization policies. We suggest that Nobel laureates have ignored the key factor that sets boom-bust cycles, which is the central bank’s monetary policies. What is required to eliminate the business cycle menace is for the central bank to stop tampering with the economy. The employment of sophisticated models regarding the recommendations of stabilization policies are only going to destabilize the economy. It is extraordinary that the Nobel laureates have ignored in their work the role of money in setting the boom-bust economic cycles.
