What Ice Cream Prices Have to Do With This Year's Nobel Prize in Economics

On Monday morning, people who follow economics tuned in to Sweden to hear who had won this year's Nobel Prize in economics. NPR's Planet Money newsletter reports that the announcement came with a lesson that involved ice cream.

The winners are Robert Hall of Stanford University and Michael Woodford of Columbia University. The prize committee honored them "for microeconomic foundations of macroeconomic stabilization." To explain what that means, committee member Timo Boppart, an economist at Stockholm University, walked around the stage like a speaker giving a TED Talk. On a screen behind him he showed an ice cream menu.

Boppart asked how companies actually set prices. He said prices do not change all the time. A business sets the price of an ice cream for a whole season. That is why ice cream is a good example. Prices, like ice cream, can get sticky. Economists use the term "sticky prices" to describe how prices can stubbornly stay put, even when conditions change.

That small detail can matter a lot for the whole economy. Sticky prices are a cornerstone of New Keynesian economics, a framework that has changed how economists think about the economy and how leaders fight recessions and control inflation. Inflation is a general rise in prices. This year's prize honored work that helped lay the foundations for that framework. Along the way, Hall, Woodford and other scholars helped bring new life to the ideas of John Maynard Keynes, whose legacy for a time seemed in danger of melting away.

Keynes is often called the father of macroeconomics, which is the study of how the whole economy works. He published his key book during the Great Depression. His idea was that an economy can get stuck in a long slump, and that the free market does not always get everyone back to work by itself. He argued that the government should help by boosting spending and putting people back to work.

Economics classes often teach the "invisible hand" of the free market, the idea that people and businesses following their own interests can help an economy reach its full potential. Keynes argued that we could not count on the invisible hand to pull us out of a slump. We needed the visible hand of the government.