How the Economy Works: Pepperdine Lecture by Roger Farmer

This is part of the DR Book Collection.

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Anyone familiar with my posts knows that economics is a major interest of mine. Hence, my interest in UCLA economist Roger Farmer’s book How the Economy Works: Confidence, Crashes, and Self-Fulfilling PropheciesFarmer provides a nice, succinct overview of the history of major economic ideas, from Adam Smith to John Maynard Keynes to Robert Lucas. He then provides an interesting merge between the principles of classical and Keynesian economics for economic recovery. Ronald Johnson of the U.S. Bureau of Labor Statistics summarizes Farmer’s position better than I can:

He believes that fiscal policy might help, but it should not involve an increase in government expenditures. However, he also believes that fiscal policy acts more slowly than monetary policy, which he clearly prefers. Since 1951, the Federal Reserve has reacted to recessions by lowering the interest rate it charges to commercial banks. Following the 2008 financial crisis, central banks throughout the world engaged in an unprecedented set of new and unconventional policies known collectively as quantitative easing. This strategy involved the purchase of a kind of asset other than government bonds, namely, mortgage-backed securities. Farmer believes that quantitative easing was the right approach, but that it should have gone further. He proposes qualitative easing, which he defines as a change in the composition of the central bank’s assets. Specifically, he would have the central bank prevent large stock movements, both up and down, from adversely affecting the economy. The bank would assert this control by the use of an index fund, the intent of which would be to manage the value of national stock market wealth by targeting the rate of growth of the fund. The Fed would announce a price path for its index funds, and the central bank would stand by ready to buy and sell the funds each day at the announced price.

Farmer concludes his book with the following:

There is much to be admired in the market system. It is the single most powerful engine of economic growth that human beings have devised. But we have not lived in a free market system for at least a century. The question is not whether to regulate the market—it is how to regulate it. As we learn more about market systems perhaps we will understand better not just why they work well but also how they occasionally fail. It is my hope that we can learn to control the economy that we live in without killing the goose that lays the golden egg (pg. 166-167).

I found Farmer’s ideas interesting, if somewhat unconvincing. The book is useful nonetheless.

You can see a five part lecture by Farmer at Pepperdine University below: