Book review: Economic sense for all?

Who would not be attracted by the hope of “Prosperity For All”? It is clear from the very beginning of this book that it is written for “anyone with a basic knowledge of economics,” although in the hope that it will also appeal to the general public.
As author Roger Farmer, professor of economics at the University of California, Los Angeles (UCLA) and co-editor of the International Journal of Economic Theory, writes: “This book is an unashamed attempt written in simple language to persuade both academic and nonacademic readers alike why economics must change and how to change it.”
He is not the only one. A group of economics students in 2012 founded the Post-Crash Economics Society at the University of Manchester. The students believe that the content of the economic syllabus and teaching methods should be seriously rethought. After the failure of economic experts to explain and foresee the economic crisis of 2008 and to present an adequate remedy, students are also looking for economic teachings that are more relevant to the world and that deal with financial crises.

‘Prosperity For All’
In this newly published book, Farmer surfs the wave of change. Unafraid of the bold challenge, he wants to fix macroeconomic theory and design a new financial policy “that stabilizes financial markets and guarantees prosperity for all.”
Farmer acknowledges that unregulated free markets can trigger higher rates of unemployment that are unacceptable.
“Government has a responsibility not just to maintain a low and stable inflation rate and to stabilize output fluctuations in the short run, but also to maintain full employment in the long run,” he writes.
Everyone is entitled to a job, but finding one is tied to the state of the market. When market participants regain confidence, they are ready to pay more for assets. When demand picks up, companies start hiring more people to supply the growing demand. Consequently, companies make more money and unemployment falls. Optimism breeds optimism or, as Farmer puts it, “when we feel rich, we are rich.”

A new distribution mechanism
He believes that during a depression, when the interest rate is zero, we should try anything and everything to restore the aggregate demand, which is measured by the sum of spending by households, businesses and the government. The aggregate demand is the biggest driving force in the economy.
“My own preferred policy would be to send a check for $1,000 to every domestic resident, paid for by printing money. That distribution mechanism puts cash in the hands of those people who know best how to spend it: You and me. But, taking a corrective fiscal action after a depression has occurred is like closing the barn door after a horse has bolted. It would be much better to design a policy that prevents a depression from starting in the first place through active treasury trades in the asset markets,” writes Farmer.
However, one of Farmer’s most pertinent proposals is that the central bank should intervene on a monthly basis in the financial markets by buying or selling shares in an exchange-traded fund (ETF) in the stock market in order to regulate the unemployment rate.
The author’s arguments are often difficult to follow for a neophyte, especially when they involve differences between pre-Keynesian ideas held by classical economists and New Keynesians who are re-interpreting such theories.
Jo Earle, a founder of the Post-Crash Economics Society, describes mainstream economics as “well defined mechanical relationships between different moving parts, connected by metaphorical pipes, cogs and levers: Interest rates go down, bank lending goes up, taxes go down, investment goes up.”
Economists often rely on mathematical models to help them to understand how markets work, how individuals make decisions and how markets and people interact to create outcomes that shape society. However, economic models cannot predict how a future model of gravity will calculate an object’s velocity.
Farmer concludes that confidence and belief drive economic activity, while fear stops people from investing and trading. He believes that the only way to prevent market fluctuations is “to design an institution, modeled on the modern central bank… Let us hope the adoption of a new financial policy that can prevent and/or mitigate the effects of financial crises on persistent and long-term unemployment will be a much swifter process than the 350 years it took to develop the modern central bank.”
Despite its general appeal, “Prosperity For All” is neither for the faint hearted nor for anyone without a basic knowledge of economics.
Farmer’s narrative is most clear when he speaks a language that ordinary people can understand but he is at his best when he challenges conventional macroeconomics and presents his ingenious monetary model. This book will certainly spark a debate that policymakers, academics and informed citizens cannot ignore.