The Royal Swedish Academy of Sciences has awarded this year’s Nobel Prize in Economic Sciences to the American economists Robert E. Hall and Michael Woodford. The prize was awarded in recognition of their development of macroeconomic models that helped to reduce the length and depth of economic downturns.

According to the Academy, the economists’ work in macroeconomic modelling has given policymakers additional tools to smooth out the economic cycle. As well as reducing the severity of downturns, their work also helped to cool the potentially negative impacts of economic booms.

Economies are known to follow cycles of downturns and upturns – and economists have long sought to find ways to tame these. More than a century ago, British economist John Maynard Keynes developed an approach to managing the economy that came to be known as Keynesianism.

Before this, the classical “laissez-faire” approach dominated. According to this doctrine, in an economic downturn, markets would eventually clear and the economy would rebound. Any attempt by government to directly influence the economy would not work and could even make things worse.

Keynes disagreed with the classical view. He believed that economies could get locked into a downward spiral that would deepen recessions and lead to economic depression. Instead, he argued that governments........

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