|
Movies Books Music Food Tv Shows Technology Politics Video Games Parenting Fashion Green Living more >

Lunch » Tags » Books » Reviews » How the Economy Works: Confidence, Crashes and Self-Fulfilling Prophecies » User review

Generally a good explanation of economics but there is a very weak ending

  • Feb 3, 2010
Rating:
+1
Farmer certainly sets his sights high in this book; he seeks to explain the reasons for the economic downturns in the eighteenth and nineteenth centuries as well as the global financial meltdown of 2008-2009. Furthermore, Farmer also proposes a mechanism to fix the current system so events similar to 2008-2009 will not happen again. Finally, this is to be done in 167 pages and not use compact technical language.
While significant progress is made with all of these goals, the only one that is really accomplished is the lack of technical knowledge; most people with a basic knowledge of economics will be able to understand the content. Farmer splits economic times into three time periods:

*) Pre Keynesian, roughly before 1940.
*) Keynesian, 1940 to approximately 1975
*) Post-Keynsian, roughly 1975 to present.

In the first category, governments maintained a largely hands-off approach to economic downturns. That policy proved catastrophic when the Great Depression hit and the re-ignition of the economy did not occur until World War II. As a consequence of this, the economic ideas of J. M. Keynes were paramount after the war, where the national government would engage in deficit spending in times of economic downturn in order to "prime the pump." The economic model that was derived from Keynesian economics predicted certain rates of inflation and unemployment and those "rules" were broken in the 1970's. A new term called "stagflation" was coined to describe these circumstances and the Keynesian models were altered or dismissed as a consequence, leading to new tactics of applied economic theory.
This splitting into timeframes is a reasonable approach and Farmer explains it well, the problem is that there were many causes to the Great Depression and meltdowns of 2008-2009, so his treatment of the causes is superficial. There is no mention of the decade-long economic decline of the middle class that took place in the 1920's and the first decade of the twenty-first century. As some astute observers have pointed out, in 2008, the concentration of the wealth into a small percentage of the citizenry largely matched that of 1929, and that is a problem. If the middle class is strained, then a small downturn in the economy can create havoc in their purchasing and it is the spending of the vast middle class that drives the bulk of economic activity.
Farmer is quite right in pointing out that the belief in "rational free markets" is by nature an irrational belief. As he explains so very well, mass psychology is often a more powerful force and if circumstances are right, an irrational and incorrect belief in an economic downturn can become a self-fulfilling prophecy. It is unfortunate that Farmer also does not mention that the speed of global communication has eliminated the presence of a lag time that previously allowed for some rational thought and moderation. When a person or entity hears of a downturn, they are forced to react almost immediately and their natural reaction will be to follow the information rather than run contrary to it.
The final section of the book is a proposal for "A plan to prevent bubbles and crashes." Only 8 pages in length, the plan is to create a weighted index of all publicly traded companies and the central bank would purchase an initial block of these index funds. The central bank would then buy and sell the index fund and this fund would serve to stabilize all assets. Somehow, even the so-called "toxic assets" would be absorbed, as the system in place would assign them an accurate value. This really stretches your "I believe" capacity; the idea that a system that would permanently solve a fundamental and global economic problem could be articulated in so few pages is very difficult to accept.

What did you think of this review?

Helpful
0
Thought-Provoking
0
Fun to Read
0
Well-Organized
0
Post a Comment
More How the Economy Works: Confide... reviews
review by . December 08, 2010
Helping us understand what is really going on, instead of taking sides
The economy has been come quite a hot and controversial topic in modern times.  This is due to what economic class people fall in and what their politic beliefs/stripes are and the current state of the economy in America  (to note a couple).  I will confess that I fall victim to these heuristics as well.  In addition, if an individual wants to educate themselves on this topic it might become extremely challenging due to all the bias surrounding this intangible topic.   …
review by . December 08, 2010
The economy has been come quite a hot and controversial topic in modern times. This is due to what economic class people fall in and what their politic beliefs/stripes are and the current state of the economy in America (to note a couple). I will confess that I fall victim to these heuristics as well. In addition, if an individual wants to educate themselves on this topic it might become extremely challenging due to all the bias surrounding this intangible topic.    This leads …
About the reviewer
Charles Ashbacher ()
Ranked #78
Charlie Ashbacher is a compulsive reader and writer about many subjects. His prime areas of expertise are in mathematics and computers where he has taught every course in the mathematics and computer … more
Consider the Source

Use Trust Points to see how much you can rely on this review.

You
CharlesAshbacher
Your ratings:
rate more to improve this
About this book

Wiki

Amazon Exclusive: A Q&A with Author and Professor Roger E.A. Farmer
view wiki

Details

ISBN-10: 0195397916
ISBN-13: 978-0195397918
Author: Roger E. A. Farmer
Genre: Business & Investing
Publisher: Oxford University Press, USA
© 2014 Lunch.com, LLC All Rights Reserved
Lunch.com - Relevant reviews by real people.
()
This is you!
Ranked #
Last login
Member since
reviews
comments
ratings
questions
compliments
lists