A Great Nobel (for Mike Woodford and Bob Hall who are more in line with Milton Friedman and Bob Lucas, not Keynes)

John H. Cochrane. Excerpt:

"As you may have heard, Mike Woodford and Bob Hall won the 2026 Nobel prize.

This is a great prize, honoring two superb and highly influential economists.

What their work has to do with Keynesian stabilization is more of a head scratcher. This prize lives a lot more in the shadow of Milton Friedman and Bob Lucas than Keynes.

Hall’s most famous paper (my review here) was a brilliant extension and test of Milton Friedman’s permanent income model of consumption, which undercut the whole Keynesian fiscal stimulus business. Hall’s approach is also the cornerstone of all subsequent macroeconomics. Keynesian economics thinks about each year in isolation. In modern economics people think about the future in deciding what to do today. That is also a central part in Bob Lucas and Ed Prescott’s justly famous Nobel contributions. And Woodford.

Woodford’s monumental work (Interest and Prices is a capstone) was centrally about monetary policy, what the Fed can and should do. Keynesian economics famously said monetary policy is ineffective so the government should pursue fiscal stimulus. There isn’t much fiscal stimulus in Woodford’s book, and what little there is in subsequent work has very little to do with the Keynesian story. Again, this is the shadow of Friedman, not Keynes. But Friedman needed the money supply. The Fed sets interest rates and ignores money supply. Woodford shows how the Fed can affect the economy by setting interest rates. The core proposition is John Taylor’s rule: the Fed should aggressively raise interest rates to tame inflation. Woodford credits the idea to Wicksell and Taylor, and the Fed discovered on its own in the 1980s. But if you don’t have equations you don’t really know anything, and that’s what Woodford (leading a pack of many others) did.

I have been a little critical of new-Keynesian economics. But mostly as I see unfinished business. I think FTPL repairs a hole in new-Keynesian economics, and finishes the job. (“Expectations and the neutrality of interest rates” sums that up best.) Indeed, my main criticism is that Woodford went through contortions to leave out fiscal policy and inflationary fiscal stimulus, and give the Fed too much (complete) power over the economy.

Even Brad de Long called new Keynesians the “triumph of monetarism.” So, really, this is one more prize for Milton Friedman and Bob Lucas, not Keynes. Woodford set out to do something “Keynesian,” but by Lucas rules: people optimize in their behavior, they can’t be fooled systematically, and we write a proper model based on people and firms and budget constraints and markets that clear. (Woodford has been looking at more complex expectations recently, but not in the original work.) Policy consists of rules, either explicit or inferred from repeated behavior, not actions. I think that Woodford and other new-Keynesians set out to rewrite “Keynesian” economics under Lucas rules. But when you read the actual equations of what they came back with, it has very little to do with Keynes. (A recent article making that point.) That’s only now becoming clear.

Hall ranges broadly over labor, investment, money, and many parts of macroeconomics. He is always innovative. I had given up hope of a Nobel for him, because he’s not the type who bangs away on one idea. I am glad to be wrong.

Reporters have asked “who else?” This has been a very productive few decades for macroeconomics, and there are a dozen or so economists who could easily have shared this prize. There isn’t that much common between Mike and Bob’s work, actually, so it’s really a generic prize for macroeconomics. I would hate to be on the committee that has to pick just two or three per year. Perhaps more macro prizes will come."

America Became Rich Because of Liberalism

By Peter J. Boettke.

"March 9, 2026, was the 250^th anniversary of the publication of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations. July 4, 2026, was the 250^th anniversary of the signing of the Declaration of Independence. These two documents are pillars of the great liberal tradition: free trade and economic freedom, the natural rights of each individual, and political freedom. Given the timing of publications, one cannot draw a direct line of influence from Smith’s scientific tract to the practical political demands of the Declaration. However, there is a great deal of evidence that the founding fathers knew of Adam Smith and the Scottish Enlightenment and drew inspiration from their works. My task here is not to revisit this question of influence, but to seek to find the common ground between the two documents we are celebrating this year, and to suggest how that common ground influenced the development of liberal political economy in the 20^th century in the hands of F. A. Hayek and Milton Friedman, the latter who won the Nobel Prize for Economics 50 years ago.

The great historian of the American Revolution, Gordon Wood, argued in The Radicalism of the American Revolution that what is most overlooked in discussions is the radical transformation of society that resulted. Colonial America was a society of status, of privileges, of station. Patronage and personal favoritism by those with power played a major role in social mobility—to the extent that it existed. This social system would all be transformed by the Revolution.  One prominent example of the legal transformation was the abolition state by state of the practice of primogeniture between 1777 to 1798.  Not only did this change the laws of inheritance, but transformed the meaning and use of property, encouraged entrepreneurship, credit markets and social and geographic mobility. Legal distinctions based on rank disappeared, and economic opportunities were based in interest, aptitude and talent rather than birth. Certainly not perfectly, it must be acknowledged. But in a far more sweeping nature than anywhere else in the world, ordinary individuals were enabled to “give it a go,” as the historian Deirdre McCloskey likes to stress about the ascendancy of the Bourgeois Era. Almost overnight, Wood argues, Americans became “the most liberal, most democratic, most commercially minds, and most modern people in the world.”

As a result, America became the richest country in history over the next 250 years. It did so without an aristocracy, and without central planning or a comprehensive blueprint by the governmental authorities. The Revolution succeeded because it created the institutional conditions for commercial civilization. It unleashed the creative powers of a free people to a greater degree than had ever been experienced before. As Hayek would stress, the transformation for a society of status to one of contract is critical to experiencing modern economic growth. And this is only possible if the governing system seeks to eliminate privileges and instead binds itself to the rule of law.

The American Constitution, democratic self-governance, geographic advantages, and abundance of resources all played a role, but it was the transformation of society that drove progress. The system of social hierarchy, deference, patronage, and inherited privileges was transformed into a system of equality before the law, civil society consisting of voluntary association, social mobility, entrepreneurship and dignity and respect for ordinary work. Commercial activity ceased being morally suspect and the marketplace was characterized by entrepreneurs, shopkeepers and independent participants rather than clients dependent on the good graces of the privileged and powerful elite.

It might make sense to pause for a minute and reflect on Smith’s choice of words for the title of his great treatise: “An Inquiry,” not “The Theory,” followed by “Into the Nature and Causes of the Wealth of Nations,” not merely “Into the Wealth of Nations.” Smith’s work was no doubt concerned with material abundance, but not exclusively so. The division of labor, as reflected in Adam Smith’s depiction of the production of a common woolen coat, wasn’t merely about productive specialization, but the establishment of peaceful social cooperation among strangers. Rather than the traditional society of domination, commercial society is based on mutually beneficial exchange. Commerce rewards prudence, trustworthiness, reliability, reputation, and self-command. The market process in this regard is a civilizing influence by taming the passions and encouraging cooperation with others of great social and physical distance. Trading, not raiding, characterizes commercial life; just as making, not taking, is recognized as the way to generate wealth.

Smith was writing at the dawn of liberty. The American experience in the centuries after that Revolution is the realization of that liberty. Again, it has never been perfect and is still not perfect, but it always strives and bends toward that Smithian liberal plan of liberty, equality and justice. In the 20^th century, the two most important political economists pressing these Smithian points and the exemplary importance of the American project were Hayek and Friedman, perhaps most importantly in their works The Constitution of Liberty and Free to Choose.

My choice of books to link these two together is somewhat unusual because most writing an article such as this would focus instead on the relationship between Hayek’s The Road to Serfdom and Friedman’s Capitalism and Freedom and the intimate connection between economic freedom and political freedom. These works, of course, are foundational to any discussion of the liberal principles of political economy and justice. But I chose The Constitution of Liberty and Free to Choose because both can be read as making significant contributions to the field of constitutional political economy (most associated with another University of Chicago product and fellow Nobel Prize winner, James M. Buchanan).

Critical to this specialized field of inquiry is how the establishment of general rules creates the conditions conducive the progress. To Hayek, America’s uniqueness was in creating a constitution and embracing institutions that formed the “machinery of government,” where millions of economic and social experiments could be going at the same time. America—however imperfect—embodied the principles of an open commercial civilization where individuals will discover opportunities, tinker and innovate, and develop new technologies. Economic freedom is not merely permission to give it a go, but a discovery procedure to learn what is worth going for in a way that nobody can know outside of the market process itself.

Friedman rightly contrasts the power of the market with the tyranny of control. The maintenance of commercial society requires limits on political power, competition to limit coercion, and choice to preserve and protect liberal pluralism. Economic freedom is not only efficient, it disperses power in society. It erodes privileges. It creates space for ordinary individuals to achieve extraordinary things. Economic freedom results from the security of property rights, freedom of contract and association, stable money and fiscal responsibility, all embodied in the rule of law.

This to me is the enduring lesson in political economy that we should derive from reflecting on the twin 250^th anniversaries and allow to guide us through our contemporary debates which too often seem to have forgotten these. Let me add one other aspect that is too often overlooked. When Hayek founded the Mont Pelerin Society, one of the names he toyed with was the Acton-Tocqueville Society. This was rejected by the original group for a variety of reasons, but it does reflect Hayek’s thinking. In the context of this article, I think we can argue that Alexis de Tocqueville provides a bridge between Wood’s historical account of the American Revolution and Hayek and Friedman’s theoretical accounts of economic and political freedom. Tocqueville observed what Wood described as the transformation of American society: a social order characterized by vibrant civil society of voluntary associations, social mobility, local initiative, and unbounded energy. Hayek explains to us why this decentralized dynamism is a source of discovery and continuous learning how to better pursue productive specialization and realize the gains from peaceful social cooperation. Friedman explains how the constitutional structure of government, by limiting power and privileges, preserves the open society and its properties of creativity, innovation and social and material progress.

Both the left and right in our current political and intellectual culture have abandoned these principles, at least in their rhetoric. New York Mayor Zohran Mamdani and Vice President J. D. Vance have recently gone out of their way in respective speeches to dismiss the ideas of Hayek and Friedman. Critics of neoliberalism repeatedly target Hayek and Friedman without seemingly any sense of understanding the subtleties and nuances in their arguments. Post-liberals are even worse. Thinkers like Patrick Deneen argue that free market policies result in the erosion of community, destroy the social fabric, and increase inequality.  The individual becomes isolated and lacks any great purpose as a result. The remedy offered is the abandonment of the free market system with its emphasis on material growth and the adoption of public policies that stress virtue, local obligations, and the moral community.  Scholars under the New History of Capitalism movement see the coercion and abuse of corporate and state power as attributes inherent in capitalism. To both groups of critics, support for capitalism must either elide over these abuses or even justify them as the lesser evil to growth.

These criticisms are grounded in a misunderstanding of the argument for the liberalization of markets from David Hume and Adam Smith to F. A. Hayek and Milton Friedman.  Markets are no doubt vehicles for efficiency in exchange and production and the creation of great material abundance, but that isn’t the side of markets that was stressed by Hayek and Friedman, let alone Smith. Smith was a champion of the doux commerce thesis that commerce civilized. Thomas Paine, of American Revolution fame, wrote that: “If commerce were permitted to act to the universal extent it is capable of, it would extirpate the system of war…” Commercial life civilizes people. Peaceful social cooperation among strangers replaces violence and conquest. Montesquieu wrote that “wherever the ways of man are gentle, there is commerce; and wherever there is commerce, there the ways of men are gentle.”

And certainly, by solving the violence trap, humanity was able to generate the wealth of nations, and this has been a boon to the flourishing of people everywhere that should be celebrated, but which capitalism’s critics so often seem to overlook or read as evidence of rapacity. In recent history, capitalism and trade has led to the great escape from abject poverty. When I was first learning economics in the 1980s, around 40% of the global population lived in extreme poverty (less than $2/day). Today that number is under 10%. Again, there is still work to be done to achieve Smith’s liberal plan of liberty, equality and justice for all. But we are farther along the path to that achievement than at any time in recorded history. The arguments of the great classical liberal economists from Smith to J. S. Mill, as well as the refinements that were made by great liberal economists of the 20^th century such as Frank Knight, Ludwig Mises, F. A. Hayek and Milton Friedman, are critical to our scientific understanding and our practical appreciation of freedom and free enterprise. These ideas of property, contract and consent are embedded deeply in the American Project, and the promise of that project is one of the Open and Opportunity society.  The direction forward is not to turn our backs on the American Project and reject the principles of free markets and entrepreneurialism, but to encourage the principles on which our democracy was founded and that, for all of its imperfections and momentary regressions, has created one of the wealthiest, free, and, yes, egalitarian nations in the history of civilization."

How ancient Athens benefited from international trade

See What Rubio Missed in Athens by Don Boudreaux.

"Here’s a letter to the Wall Street Journal.

Editor:

Marco Rubio rightly defends western civilization and acknowledges debts owed to the ancient Athenians (“The Birth and Rebirth of Western Civilization,” October 9). But he omits an essential feature of ancient Athens – a feature that he, President Trump, and all Americans would do well to recall: Athens’s rise and excellence were rooted in its openness to, and reliance upon, international trade. As Will Durant explained in The Life of Greece (1939),

Foreign commerce advances even faster than domestic trade, for the Greek states have learned the advantages of an international division of labor, and each specializes in some product; the shieldmaker, for example, no longer goes from city to city at the call of those who need him, but makes his shields in his shop and sends them out to the markets of the classic world. In one century Athens moves from household economy – wherein each household makes nearly all that it needs – to urban economy – wherein each town makes nearly all that it needs – to international economy – wherein each state is dependent upon imports, and must make exports to pay for them….

[I]t is this trade that makes Athens rich, and provides, with the imperial tribute, the sinews of her cultural development. The merchants who accompany their goods to all quarters of the Mediterranean come back with changed perspective, and alert and open minds; they bring new ideas and ways, break down ancient taboos and sloth, and replace the familial conservatism of a rural aristocracy with the individualistic and progressive spirit of a mercantile civilization. Here in Athens East and West meet, and jar each other from their ruts. Old myths lose their grasp on the souls of men, leisure rises, inquiry is supported, science and philosophy grow. Athens became the most intensely alive city of her time."

America’s Affordability Problem Is Government

By Dan Mitchell.

"I have a series of columns (2021, 2024, 2025, and 2026). documenting that Americans are getting richer.

And here’s a chart that adds additional evidence. More and more households over time are high income (over $100k) and fewer and fewer are low income (under $35k).

And, yes, these numbers are adjusted for inflation.

The chart was included as part of an article by Max Borders for the Advocates of Self-Government.

He asked why people feel economically anxious even though incomes have increased.

The answer is that some important purchases have become relatively more expensive. And the reason, unsurprisingly, often involves bad government policy.

Here are some excerpts.

In 1967, only 16.5 percent of households earned the equivalent of $100,000 or more in today’s dollars. Today? Nearly 45 percent. The middle-income group really has shrunk—from 54 percent of households to 36 percent. …The disappearing middle class didn’t simply tumble into poverty. Millions of households graduated into higher real incomes, despite persistent inflation. And the percentage at the bottom fell, too. …We’re richer. Many of the things we buy have become dramatically better and cheaper. But some of the things we cannot easily do without have become painfully expensive. …Start with housing. Why don’t developers just build more homes where people want them? Often because it’s illegal. Zoning restrictions and building codes are costly. Minimum lot sizes consume land. Parking requirements increase costs. Permitting adds delays. NIMBY opposition prevents construction. Then we all express shock that restricting the supply of something makes it more expensive. Or consider health care. Whatever else American health care is, it is not some laissez-faire free-for-all. It’s a labyrinth of government subsidies, third-party payments, occupational licensing, insurance regulation, patent protections, insurance mandates, in-state monopolies, and restrictions on competition. …And then there’s college. For decades, our solution to expensive higher education has been to give people more money with which to buy increasingly expensive higher education. This has created a tuition spiral: Loans. Grants. Subsidies.

The article includes another chart from Mark Perry.

It shows how prices for some items have increased much faster than inflation while others have declined. In some cases by large amounts.

And notice that prices seem to go up the most in the areas where government has a big footprint.

I’ll close with a few more passages from the article.

…not every red line on this chart is caused by government. But officials can make an intrinsically expensive problem considerably worse. …If your diagnosis is that “capitalism” has made ordinary life unaffordable, your solution will probably be more subsidies, more controls, and more regulation. But what if the diagnosis is backward? What if competitive markets are actually doing remarkably well in much of the economy—and our worst affordability crises are concentrated in sectors where competition, supply, and productivity are tightly regulated and unusually constrained? …we’ve constructed bottlenecks to accessing some of the most important things in life. Housing. Health care. Education. Childcare.

Amen. To make life more affordable, we need free enterprise, not subsidies, intervention, protectionism, and third-party payer.

Government is the problem, not the solution."

GLP-1 Weight-Loss Drugs Keep Getting Cheaper: Thank Competition

By Gale Pooley of Cato. Excerpt:

"When Wegovy’s one-of-a-kind treatment debuted in 2021, a month’s supply cost $1,349. At the time, blue-collar employees were earning an average of $26.12 an hour, putting the time-price at 51.65 hours per month, or more than six days’ wages.

Employer insurance plans balked, and the government’s health programs were barred from covering weight-loss drugs unless there was a specified medical complication. More than half of American adults (137 million) meet the medical criteria to benefit from the FDA’s approved uses of GLP-1s: the cost of covering them all is enormous.

Even with mostly cash payers, demand outstripped supply, putting Wegovy on the FDA’s drug-shortage list. With that designation came a legal path for pharmacies to compound the product themselves, and offer lower-priced alternatives through telehealth and cash-pay programs.

Two years later, a second major company gained FDA approval for an injectable drug for chronic weight management. Eli Lilly’s Zepbound is pharmacologically different, but its effects are similar and it competes for the same patients and insurer budgets. The list price undercut Wegovy, at $1,060.

Here’s where things really get interesting.

Eli Lilly knew few of the potential beneficiaries of its medication would qualify for the medication through their insurers. So it offered a special $550 cash price for patients whose insurance didn’t cover GLP-1s. In 2024, it launched LillyDirect: a direct-to-consumer, cash-pay distribution for its competing product. Direct-to-consumer cash-pay pathways allowed patients to bypass asking “which drug does my insurance cover?” and forced manufacturers to compete in a more retail-like environment.

And compete they did. Novo Nordisk introduced its own cash-pay option for Wegovy — NovoCare. Its lowest dose was priced at $499/month. In April 2025, with the FDA’s shortage resolved and still facing innumerable gray-market and privately compounded copies of semaglutide, Wegovy’s price was reduced again, to make the authentic brand more price-competitive for patients, who Novo knew could easily switch. Standard self-pay injectable Wegovy dropped to $349/month, with a $199/month introductory offer.

In response, Eli Lilly cut Zepbound’s cash pricing, offering the typical maintenance dose for $299 by December 2025. Prescribers and patients became more comfortable switching between major branded therapies that filled essentially the same medical need. That increased the price pressure on drugmakers who were accustomed to negotiating with insurer formularies and formal rebate systems.

Almost immediately after Zepbound’s price reduction, the FDA approved an oral formulation of Wegovy. Clinical trials show the once-a-day pill is almost as effective as the injectable, and the pill form expands the available market to include patients unwilling to self-inject GLP-1s.

Today, the oral maintenance dose of brand-name Wegovy costs $299 a month for self-paying patients. Self-pay pricing for injectable Wegovy settled at $349. Fifty percent of sales of both Wegovy and Zepbound are direct exchanges with cash-paying patients.

Our “average” blue-collar worker from 2021 is now earning $32.53/hour. The time price of his monthly weight-loss treatment has fallen by 75 to 80 percent.

Over the same period, according to BLS reports, hospital services have risen 26.6 percent, and medical care prices, 12.9 percent. Overall consumer inflation (CPI) has increased 22.5 percent."

The Stealth Tax in Proposition 40

By David R Henderson. Excerpts:

"California’s Proposition 40 would impose a one-time tax of 5% on people with a net worth of $1 billion or more."

":The initiative’s Section 50310 states: “The Legislature may amend the 2026 Billionaire Tax Act, by statute passed in each house of the Legislature . . . [with] two-thirds of the membership concurring, if the statute is consistent with and furthers the purposes of the 2026 Billionaire Tax Act.”"

"California’s heavily Democratic Legislature could use the law to increase taxes on people who aren’t close to being multimillionaires—let alone billionaires."

"Most personal property is taxable at the same rate as real property (1%), while taxes on stocks and bonds are capped at 0.4%. The authors of Proposition 40 apparently understood this and wrote Section 50310 to supersede Article XIII [of California’s Constitution]." 

"After the 16th Amendment authorized the federal income tax, it started small. In 1913 the tax rate on married couples filing jointly was 1% on income up to $20,000 (equivalent to some $674,000 today). The top rate was 7%, on income above $500,000 ($16.8 million today). Five years later, in the midst of World War I, the rate was 6% on income up to $4,000 and 77% on incomes over $1 million."

In São Paulo entrenched interests lost out due to less restrictive housing regulations; prices went down & new households benefited

See Who benefits from upzoning? A 2016 zoning reform in São Paulo increased the ability of developers to supply housing units by lifting limitations on permitted densification on a block-by-block basis by Tyler Smith of the AEA.

It looks like the eighborhoods receiving the largest reductions in regulations saw the biggest increase in supply and the biggest decrease in prices. See the text in red near the end.

"The share of the world's population living in cities rose from 33 percent in 1960 to 56 percent in 2019 and is projected to reach 68 percent by 2050, with much of that growth concentrated in developing countries. Whether cities can provide sufficient housing for those future residents depends on local land use rules, which determine where and how developers can build.

But measuring the effects of these rules has proven difficult. Data limitations, complexity, and endogeneity have stymied efforts to estimate the value of zoning reforms.

In a paper in the American Economic Journal: Economic Policy, authors Santosh Anagol, Fernando Ferreira, and Jonah Rexer  examine a 2016 zoning reform in São Paulo and related detailed administrative data to assess the impact of zoning policies. 

"The really hard thing about studying zoning is getting fine-grained information on the actual rules that are enforced on the ground," Anagol told the AEA in an interview.

The central regulatory parameter for land use in São Paulo is the built area ratio (BAR)—floor space divided by lot area. The 2016 zoning reform stripped the city's 32 neighborhood governments of the power to set the maximum BAR, assigning new values block by block with the aim of densifying corridors served by metro, rail, and bus lines. 

Across roughly 45,000 blocks, the average maximum BAR rose from 1.55 to 2.09, permitting an average of 36 percent more construction on a given parcel. However, the distribution of reforms was uneven. Forty-five percent of blocks received an increase of 1 BAR or more while nearly half saw no change or a reduction.

The authors exploited this block-level variation using a boundary discontinuity design. Blocks whose maximum BAR increased were used as treatment groups, and the nearest blocks where the maximum BAR held constant or fell were used as controls.

The authors supplemented the building permit records with property tax records, real estate listings from 2019 to 2022, formal sector wage data, and a 2017 commuting survey of 24,800 households. They then estimated an equilibrium model in which developers choose how much to build, and households choose among 329 commuting zones, based on price, commuting time, access to high-paying jobs, building age, density, and neighborhood characteristics.

According to the authors’ estimates, developers responded quickly to zoning reforms. A 1.4-point increase in maximum BAR raised multifamily permit filings by roughly 66 percent relative to nearby control blocks, with differences emerging about a year after passage of the reform and growing thereafter. Notably, single-family permits were unaffected, consistent with BAR easing constraints primarily on larger structures. 

Between 2019 and 2022, listings for sale grew about 10 percent faster in treated blocks. At the commuting-zone level, a 1-point BAR increase was associated with 10.9 percent higher listings growth and a 5.7 percentage-point reduction in prices.

By simulating the model for ten years following the reform, the authors estimated that the reform added roughly 39,000 units—a 1.6 percent increase in the housing stock—and reduced average prices by 0.4 percent. The authors suggest that this modest average can be explained by BAR rising only 0.54 overall. But neighborhoods receiving the largest increases saw up to 17.5 percent more units and 3 percent lower prices. 

"While in the long run it may bring all prices down, the welfare gains, at least initially, may be concentrated amongst higher-income, higher-educated groups," Anagol said. 

The reform produced a nominal wealth transfer of 11.33 billion reais, or 1.62 percent of city GDP, from current homeowners and landlords to future real estate owners. The size of the transfer suggests that it may generate political repercussions. 

"The entrenched interests lose out from these housing reforms when prices go down, whereas new households benefit," Anagol said.

The work shows that targeted upzoning produces real supply responses and localized affordability gains. But the concentration of losses among existing owners may help explain why reforms of this kind remain difficult to pass.

♦

“Estimating the Economic Value of Zoning Reform” appears in the August 2026 issue of the American Economic Journal: Economic Policy."