How to Prevent Financial Crises
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A heady wrestling match with the Neo-Keynesians, so touchingly reliant on the Phillips Curve, in the effort to carve out a new view of macroeconomics.

Make no mistake about it: Farmer (How the Economy Works, 2010, etc.), distinguished professor of economics at UCLA and co-editor of the International Journal of Economic Theory, is not writing for civilians. His stated project is to “fix macroeconomic theory,” which is no small matter, and to use it to help design real-world financial and economic systems that promote stability and prosperity. In that cause, he is capable of writing some knotty prose, a relatively unchallenging example of which is this: “In first-generation endogenous business cycle models, the economy retains the self-correcting mechanisms that Frisch described in his rocking-horse metaphor. Confidence shocks do rock the horse, but in this respect they are no different from productivity shocks, strikes, hurricanes, and monetary disturbances.” There’s a lot to unpack there, just as there is in his ensuing note that the central idea to come from Keynes’ general theory is that “economic equilibrium can be Pareto inefficient.” A reader well-trained in matters Pigouvian will not shrink from Farmer’s discussion, though anyone else will find it daunting. That said, the author gets into areas that classical macroeconomics often shies from because they are not easily quantified, including his fruitful idea that confidence and belief are essential components of economic activity and fundamentals that merit the methodological status of other measures; put another way, in his words, “when we feel rich, we are rich.” Feel? Yes, and though Farmer’s argument is never cuddly, it accounts for the human emotion that mathematically driven models overlook: when businesspeople feel nervous, they don’t invest, resulting in low values and volatile prices—and nervousness is the key emotion of our time.

Technical but rarely arid and of interest to economists, investors, and policymakers.

Pub Date: Oct. 3rd, 2016
ISBN: 978-0-19-062143-8
Page count: 288pp
Publisher: Oxford Univ.
Review Posted Online:
Kirkus Reviews Issue: Sept. 1st, 2016


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