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How the economy works : confidence, crashes and self-fulfilling prophecies Roger E.A. Farmer [Text]

Material type: TextTextPublisher: New York Oxford University Press 2010Description: xiv, 193 p. ill., ports. 22 cm hbk.ISBN: 9780195397918.Subject(s): Economic policy | Free enterprise | MacroeconomicsDDC classification: 339
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Enhanced descriptions from Syndetics:

"Of all the economic bubbles that have been pricked," the editors of The Economist recently observed, "few have burst more spectacularly than the reputation of economics itself." Indeed, the financial crisis that crested in 2008 destroyed the credibility of the economic thinking that hadguided policymakers for a generation. But what will take its place?In How the Economy Works, one of our leading economists provides a jargon-free exploration of the current crisis, offering a powerful argument for how economics must change to get us out of it. Roger E. A. Farmer traces the swings between classical and Keynesian economics since the early twentiethcentury, gracefully explaining the elements of both theories. During the Great Depression, Keynes challenged the longstanding idea that an economy was a self-correcting mechanism; but his school gave way to a resurgence of classical economics in the 1970s - a rise that ended with the current crisis.Rather than simply allowing the pendulum to swing back, Farmer writes, we must synthesize the two. From classical economics, he takes the idea that a sound theory must explain how individuals behave - how our collective choices shape the economy. From Keynesian economics, he adopts the principlethat markets do not always work well, that capitalism needs some guidance. The goal, he writes, is to correct the excesses of a free-market economy without stifling entrepreneurship and instituting central planning.Recent events have shown that we cannot afford to treat economics as an ivory-tower abstraction. It has a direct impact on our lives by guiding regulators and policymakers as they make decisions with far-reaching practical consequences. Written in clear, accessible language, How the Economy Worksmakes an argument that no one should ignore.

Includes bibliographical references and index

In this work, the author provides a jargon-free exploration of the current economic crisis, offering a powerful argument for how economics must change to get us out of it. Farmer traces the swings between classical and Keynesian economics since the early 20th century, explaining the elements of both theories.

Table of contents provided by Syndetics

  • Preface
  • 1 Introduction
  • 2 Classical Economics
  • 3 Keynes and the World Economy
  • 4 Where the Keynesians Lost Their Way
  • 5 The Rational Expectations Revolution
  • 6 How Central Banks Impact Your Life
  • 7 Why Unemployment Persists
  • 8 Why the Stock Market Matters to You
  • 9 Will There be Another Great Depression?
  • 10 Will Monetary and Fiscal Policy Work?
  • 11 How to Solve a Financial Crisis
  • Glossary
  • Notes

Reviews provided by Syndetics

Library Journal Review

Farmer (economics, Univ. of California, Los Angeles; Macroeconomics) succinctly traces the history of economic thought; explains landmark U.S. economic events, including the 2007-09 recession; and proposes improved macroeconomic theory. The task of explaining so much is near impossible, yet Farmer succeeds remarkably well. After summarizing classical and Keynesian economics (along with their variants), he synthesizes the two into a radical but pragmatic new proposal, "a plan to end bubbles and crashes." He builds on existing macroeconomic thought to argue for a strikingly ambitious novel monetary policy. His recommendation calls on the Federal Reserve and other central banks to smooth out swings of confidence in the economy by making timely purchases or sales of stock index funds. With a more stable stock market and thus more enduring confidence, consumers would spend more consistently, and "bubbles and crashes" would be prevented. VERDICT Readers who lack the time or interest to sift through in-depth explanations of economic theories will gain from Farmer's brief explanations of standard economic theories and biographical sketches of major thinkers. Those looking for a mathematical outworking of his provocative proposed model will have to look beyond this volume to the author's oft-referenced other-more "wonkish"-works.-Jekabs Bikis, Dallas Baptist Univ. (c) Copyright 2010. Library Journals LLC, a wholly owned subsidiary of Media Source, Inc. No redistribution permitted.

Publishers Weekly Review

Farmer, professor and chair of the economics department at UCLA, offers a detailed explanation of macroeconomics, showing how unemployment, inflation, and interest rates are connected and how they are influenced by government monetary and fiscal policy. Attempting to speak to the layperson as well as the academic (with mixed results; Farmer's real audience might be the latter), he wades into the difference between classical and Keynesian economics and shows how they have influenced recent policy debates. He shows how central banks influence individual lives, why unemployment persists, and why the stock market matters to everyone. Farmer also ponders if there will be another Great Depression and puts forth a solution for solving and preventing financial crises. Along the way, he provides an abbreviated history of economic thought from Revolutionary days to the present. Readers with a serious interest in this subject will find this timely book informative, but those looking for a gentler introduction will need to look elsewhere. (Apr.) (c) Copyright PWxyz, LLC. All rights reserved


Chair of the UCLA economics department, Farmer has two purposes in this book. First, he offers a summary of the many decades' debate between classical and Keynesian economists. Second, he presents his own prescription to resolve the current economic crisis. The historical account of economic theory is especially useful, introducing the reader to key figures in the debates and pointing out strengths and weaknesses in competing points of view. The focus is on mainstream US economists who have struggled to reconcile a classical individualistic model of markets with Keynesian insights about market failures. The summary of policy recommendations is based on Farmer's book, Expectations, Employment and Prices (2010). He uses a market model of job search as well as behavioral economics insights on financial markets to explain why the crisis occurred and what should be done to resolve it. Readers interested in policy recommendations should also consult works by Dean Baker, Joseph Stiglitz, and Richard Posner. Summing Up: Recommended. General readers; all levels of undergraduate students; practitioners. M. H. Maier Glendale Community College

Booklist Review

Farmer explains the differences between classical and Keynesian economics and shows how they influenced the policy debate that developed after the 2007 world financial crisis began and exploded into a global disaster, with the collapse in the U.S. of Lehman Brothers in the fall of 2008. Along with a history of economic thought from 1776 to the present (noting it is incomplete), the author offers his suggestions for preventing future financial crises. The correct response to the crisis is to set in place, in every country in the world, an institution to control the value of national stock market wealth by targeting the rate of growth of an index fund. Central banks should use changes in the size of their balance sheets to prevent inflation from rising too high or too low. They should use changes in the composition of their balance sheets to prevent bubbles and crashes. This challenging book will appeal to the academic community but not to a broad range of readers.--Whaley, Mary Copyright 2010 Booklist

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