1. Introduction -- The collapse of Northern Rock -- Classical and Keynesian economics -- The size of government -- Efficient markets -- The Roaring Twenties -- The Great Depression -- Stagflation -- Why fiscal policy is the wrong approach -- What governments should do instead -- A new paradigm and a new policy -- 2. Classical economics -- How the economic pieces fit together -- Do markets work well? -- A mark, a yen, a buck, or a pound -- Is all that makes the world go around -- Helicopter Ben -- Economic frictions -- 3. The impact of Keynes on the world economy -- Maynard Keynes's New Vision -- Unemployment during the Great Depression -- Keynes's escape from classical economics -- Keynesian theory -- Keynesian policy -- 4. Where the Keynesians lost their way -- Keynes's Theory of Prices -- Bill Phillips and his machine -- Bill Phillips and his curve -- Two American Keynesians -- The Natural Rate Hypothesis -- The bell tolls for Bill Phillip's curve -- Natural Rate Theory: fact or fiction? -- Science or religion? -- 5. The rational expectations revolution -- Bob Lucas and economic policy -- The French influence -- How Lucas changed macroeconomics forever -- Real Business Cycle Theory -- New-Keynesian economics -- Quantity theorists in Keynesian clothes -- 6. How central banks impact your life -- Who owns the Fed? -- Money makes the world go around -- The modern Fed -- Fighting inflation -- Fighting unemployment -- Why inflation matters -- The great moderation -- The role of good luck -- Minsky moments -- In defense of central banks -- The future of Central Banking -- 7. Why unemployment persists -- Putting unemployment back into the classical model -- Why this didn't work: Shimer's puzzle -- Is unemployment optimal? -- Sand in the oil -- Why search markets don't work well -- Why high unemployment exists -- Why the wage doesn't fall -- Classical and Keynesian uses of Search Theory -- 8. Why the stock market matters to you -- Do fundamentals drive markets? -- Or does confidence drive markets? -- Who is right? -- Swings in confidence are rational -- Behavioral economics or rational choice? -- Wealth matters -- Where Keynesian economists went wrong -- Stopping a stampede -- 9. Will there be another great depression? -- Two Black Mondays -- Greenspan the Wizard -- The 2008 crash -- Housing and stocks: twin peaks -- Deregulation and accounting rules -- The end of Glass-Steagall -- Fair value accounting -- Was deregulation to blame? -- Illiquidity or insolvency? -- What will happen next? -- 10. Will monetary and fiscal policy work? -- Traditional monetary policy -- Quantitative easing -- Bernanke's plan -- What Central Bankers think -- When the bubble bursts -- Obama, Brown, and Sarkozy -- Christina Romer's magic multiplier.is it really that big? -- Learning from the Great Depression -- The first stage of recovery -- The second stage of recovery -- Two reasons for government deficits --Do we need a bigger government? -- Will the stimulus restore confidence? -- Give me a one-armed economist -- 11. How to solve a financial crisis -- What happened in 2008 -- Adding a new policy lever -- Indices and Index Funds -- A plan to prevent bubbles and crashes -- Setting up a fund -- Pulling the lever -- How to fix the banks -- My argument summarized -- Between Keynes and Hayek. ""Of All the Economic Bubbles that have been pricked," the editors of the Economist recently observed, "few have burst more spectacularly than the reputation of economics itself." Indeed, the financial crisis that crested in 2008 destroyed the credibility of the economic thinking that had guided policymakers for a generation. But what will take its place?" "In How the Economy Works, one of our leading economists provides a jargon-free exploration of the current crisis, offering a powerful argument for how economics must change to get us out of it. Roger E.A. Farmer traces the swings between classical and Keynesian economics since the early twentieth century, gracefully explaining the elements of both theories. During the Great Depression, Keynes challenged the long-standing idea that an economy was a self-correcting mechanism, but his school gave way to a resurgence of classical economics in the 1970s - a rise that ended with the current crisis. Rather than simply allowing the pendulum to swing back, Farmer writes, we must synthesize the two. From classical economics, he takes the idea that a sound theory must explain how individuals behave - how our collective choices shape the economy. From Keynesian economics, he adopts the principle that markets do not always work well, that capitalism needs some guidance. The goal, he writes, is to correct the excesses of a free-market economy without stifling entrepreneurship and instituting central planning."--Jacket.