By Sugath Amarasekera –

Interestingly, many of the economic issues highlighted by the 2026 Nobel laureates, Robert E. Hall and Michael Woodford, have already featured in my columns and those of others examining Sri Lanka’s economic crisis and the limitations of prevailing economic policies.

Their work on the microeconomic foundations of macroeconomic stabilisation reinforces an important proposition: an economy cannot be understood or stabilised simply by manipulating interest rates, controlling inflation or meeting fiscal targets. Policymakers must also understand how households and businesses respond to these policies, how expectations shape economic behaviour, and how changes in income, credit and demand influence production and employment.

These questions are particularly relevant to Sri Lanka, where declining household purchasing power, restricted access to affordable credit and inadequate productive investment have raised serious concerns about the sustainability of economic recovery.

The recognition given to these economists also invites a broader discussion about the intellectual foundations of contemporary economic policymaking.

For decades, neoliberal economic thinking has exerted considerable influence over economic policy in capitalist democracies. Fiscal austerity, inflation control, market liberalisation and the discipline imposed by financial markets have frequently taken precedence over policies designed to expand productive capacity, strengthen domestic demand and improve income distribution.

Yet economic outcomes cannot be separated from the institutional and social conditions in which policies operate. A policy that reduces inflation may simultaneously suppress investment and employment if it relies excessively on high interest rates and restrictions on credit. Fiscal consolidation may improve government accounts while weakening household consumption and the revenues of domestic businesses. The consequences depend on the circumstances, the timing and the distribution of the costs.

This is where Keynesian economics remains relevant. Keynes challenged the assumption that markets would automatically restore full employment and demonstrated the importance of aggregate demand in determining economic activity. Subsequent developments in economic theory, including the work recognised by this year’s laureates, have sought to explain more precisely how individual decisions, expectations and policy interventions interact to shape macroeconomic outcomes.

However, I would question whether these advances have been adequately reflected in the actual conduct of economic policy. Central banks and governments have often continued to operate within established policy frameworks, even when their consequences for employment, productive investment and household welfare warrant a fundamental reassessment.

The problem is not that monetary discipline, fiscal responsibility or price stability are unnecessary. All are important. The question is whether these objectives have been pursued at the expense of other equally essential goals: economic growth, productive employment, technological advancement and rising living standards.

For Sri Lanka, this distinction is critical. Economic recovery should not be judged solely by headline inflation, exchange-rate stability, fiscal balances or the achievement of external financing targets. It must also be assessed by whether household incomes are recovering, businesses are expanding production, credit is reaching productive sectors, and employment opportunities are improving.

Our challenge is therefore not simply to comply with an established economic model, but to examine critically whether the model, as applied to our particular circumstances, can deliver sustainable and inclusive development.

The Nobel laureates’ work provides valuable analytical tools for this examination. It does not, by itself, establish that neoliberalism is invalid or prescribe a particular alternative. Nevertheless, it strengthens the case for moving beyond mechanical policy rules towards a more comprehensive understanding of economic behaviour and policy consequences.

The fundamental question is whether economic policy should serve the targets of the economic model, or whether the model itself should be judged by its ability to serve the needs of society. For Sri Lanka, answering that question is central to developing an economic strategy that combines stability with productive transformation, employment and shared prosperity.