Mankiw updates Friedman’s 1965 line for a sticky-price generation
The 2026 Nobel Prize in economics opened Monday with an unusual prop. Timo Boppart, a Stockholm University economist and member of the prize committee, stood up and walked around like he was giving a TED Talk. At one point he brought up an image on the screen behind him: an ice cream menu.
Boppart used the ice cream menu to serve up a sweet lesson in economics. “How do firms actually set prices?” Boppart asked. “This is illustrated here with this ice cream menu. Prices do not adjust [on] a continuous basis. Firms instead set the price of this ice cream for a whole season.”
Ice cream was a poetic example. Because prices, like ice cream, can get sticky. In fact, economists use the term “sticky prices” to describe how prices can stubbornly stay put even as economic conditions change.
That seemingly minor detail can have huge consequences for the entire economy. Sticky prices are a cornerstone of what’s known as “New Keynesian economics” — a framework that has helped reshape macroeconomic theory and how policymakers think about fighting recessions and controlling inflation.
The committee’s prop walked the audience through the body of work the prize recognized. The Nobel committee in Stockholm announced Monday that it had awarded the 2026 economics prize to Robert Hall of Stanford University and Michael Woodford of Columbia University “for microeconomic foundations of macroeconomic stabilization.” The work placed sticky prices and the forward-looking decisions of households and firms at the center of macroeconomic models.
The announcement honored decades of research that helped lay the foundations for New Keynesian economics. Hall broke new ground in understanding how people’s expectations about the future shape their spending today. Woodford built on that work, developing a framework that combined forward-looking spending decisions with sticky prices.
The intellectual lineage runs through John Maynard Keynes. In The General Theory of Employment, Interest, and Money, published during the Great Depression, Keynes argued that an economy can get stuck in a prolonged slump and that the “invisible hand” of free markets cannot be relied on to restore full employment. For years, that framework dominated macroeconomic thinking, so much so that free-market advocate Milton Friedman declared in 1965, “We are all Keynesians now.” Friedman later said the quote was taken out of context.
Then came the stagflation of the 1970s — the painful combination of high inflation and high unemployment that prevailing Keynesian models struggled to explain. “For a long time, the recipes of Keynes seemed to work, but they then failed during the oil crisis in the 1970s when high unemployment and high inflation took over simultaneously,” said John Hassler, the chair of the Nobel committee, when they announced the prize.
Economists Robert Lucas and Edward Prescott — both later Nobel laureates — pushed the critique further, arguing that existing models leaned on patterns in past data without grounding them in the actual decisions of households and firms. The pair also championed “real business cycle” theory, which assumed prices and wages were completely flexible, adjusting freely as economic conditions changed. If demand for workers fell, wages could fall too, balancing the labor market. That assumption left little room for a familiar feature of recessions: people who want to work but can’t find jobs.
Gregory Mankiw, now at Harvard, entered MIT’s graduate program alongside Woodford in 1980, just as economists were fighting over how to rebuild the field. “Lucas and Prescott were ascendant, but a lot of us were skeptical of their conclusions,” Mankiw told Planet Money. “And that’s when people like Woodford and Hall sort of entered the stage. The sense was that the people who were rejecting the Keynesian model were throwing out the baby with the bathwater. And so rather than throwing it out, they wanted to sort of fix the problems.”
Hall and Woodford’s reconstruction centered on “microfoundations” — rebuilding macroeconomic models around the decisions of individual people and businesses — and on price stickiness. To see why sticky prices matter, consider what happens in a recession. Demand for ice cream plummets. Shops might not quickly reduce prices to entice customers back — changing menus and signs costs time and money, and managers may not yet know whether the demand drop is temporary or here to stay. So they keep prices frozen, sell fewer scoops, and ultimately may end up having to cut worker hours or lay people off. When prices don’t adjust, production and employment take the hit.
The same story goes for wages, which we guess are a bigger factor in the economy than ice cream prices. “When economists talk about sticky prices, they’re also including sticky wages — the price of labor,” Mankiw said. “Most people don’t get their wages adjusted every month.”
Across the economy, that stickiness — or “price rigidity,” in the technical language — has consequences. When spending drops, prices and wages do not quickly and flexibly adjust to keep people buying and businesses hiring. Instead of prices falling to bring supply and demand together, price stickiness causes production and employment to fall. It helps explain why, during recessions, people who want to work can remain out of a job for long stretches. “Bringing in those price rigidities into the framework was absolutely key because this is the reason why the invisible hand cannot do its magic and there is room for policy intervention,” Boppart said at the Nobel Prize announcement.
Woodford’s work provided much of the theoretical foundation for “forward guidance,” a strategy the Federal Reserve deployed during the Great Recession. The Fed slashed its benchmark interest rate to near zero, but the economy still needed stimulus. So under then-Chair Ben Bernanke, the Fed signaled that it expected to keep interest rates low for an extended period. By shaping expectations about future rates, the Fed tried to help lower longer-term borrowing costs and encourage spending today.
In Mankiw’s update to Friedman’s famous line, the Harvard economist offered a one-sentence summary of where the field now stands. “We’re all New Keynesians now,” Mankiw said. “One thing that clearly differentiates Keynesian models from Real Business Cycle models was the flexibility or stickiness of prices. Most economists today — not all — but I think most economists today buy into the sticky price assumption.”
The prize, in other words, recognizes how a generation of economists took the critics’ challenge seriously, rebuilt the macro models from individual decisions upward, and preserved what they considered the essential Keynesian insight: left alone, an economy with sticky prices can stay stuck, and government and central bank action still has a role in pulling it out.
Although widely called the “Nobel Prize in economics,” the award is not one of the original prizes Alfred Nobel created. The economics prize technically carries a different, “much clunkier” name, and was added to the prize roster after the fact.