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Prosperity for All by Roger Farmer (Book Review)

Roger Farmer, the distinguished professor of UCLA, challenges the orthodox macroeconomics models, especially New Keynesian model, in his new book- Prosperity for All: How to Prevent Financial Crises.

The human being in me is deeply disturbed by every crisis. The economist in me recognizes the invaluable opportunity that is provided by every crisis to disentangle one economic theory from another. Just as the astrophysicist learns by observing the explosion of a supernova; so the economist learns from observing the fallout from a major economic catastrophe. The Great Recession has both taught and reminded us that the existing economic theory that guides policy-makers in treasuries and central banks is deeply flawed. It is time for a paradigm change. – R. Farmer

9780190621438

Farmer argues that unregulated free markets can trigger higher rates of unemployment, which are unacceptable.By this he mentions that, Central Banks should be intending to keep the full employment besides the targeted inflation rate, and output fluctuations.

An important idea he highlights in the book is the fact that beliefs are important. Animal spirits is an independent driver of economic activity. When market participants regain confidence, they pay, or are ready to pay, more for assets. When demand increases, firms start hiring more people to bring the supply up to meed demand. Hence, firms earns more and unemployment falls. Optimism breeds optimism, in other words,  when we feel rich, we are rich.

Rational expectations is a great assumption. In the words of Abraham Lincoln: you can’t fool all of the people all of the time. But, even in a stationary environment where the world is not changing in unpredictable ways, RATIONAL EXPECTATIONS IS NOT ENOUGH TO DETERMINE BELIEFS.

Roger Farmer does not like New Keynesians. In his book, he argues against the Natural Rate Hypothesis. He acknowledges that the natural rate of unemployment rate is not unique. There are different unemployment rates at which the economy can permanently stay; and it depends on the expectations held by the public about nominal future income. The relationship between current income and expected future income is what Roger calls the belief function.

Farmer believes that the only way to control the market fluctuations is the adoption of a new financial policy that can prevent and/or mitigate the effects of financial crises on persistent and long-term unemployment.

Having an interesting book and challenging theory, Farmer faced many critiques. Despite, being bold and going against the orthodox tools of macroeconomics shows that there is strong tendency for innovation in macroeconomic science.