How the Economy Works: Confidence, Crashes and Self-Fulfilling Prophecies

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Oxford University Press, USA, Apr 8, 2010 - Business & Economics - 208 pages
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"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 had guided 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 twentieth century, 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 principle that 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 Works makes an argument that no one should ignore.

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About the author (2010)

ROGER E. A. FARMER is a 2013 Senior Houblon Norman Fellow at the Bank of England. He is a Distinguished Professor of Economics at UCLA and served as Department Chair from July 2008 through December 2012. The author of six books and numerous academic journal articles, he is a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research and a Research Fellow of the Centre for Economic Policy Research. Professor Farmer has served, and continues to serve, as a consultant to central banks around the world. He is a regular contributor to the Financial Times, Project Syndicate and VoxEU. He is a co-winner of the 2013 Maurice Allais Prize in Economic Science for his work on the inefficiency of financial markets; and in 2000, he received the University of Helsinki medal in recognition of his work on self-fulfilling prophecies.

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