The current consensus economic model, the neoclassical synthesis, depends on aprioristic assumptions that are shown to be invalid when tested against the data and fails to include finance. Economic policy based on this consensus has led to the financial crisis of 2008, the 'Great Recession' that followed, and the slow subsequent rate of growth. In The Economics of the Stock Market, Andrew Smithers proposes a model that is robust when tested, and by including the impact of the stock market on the economy, overcomes both these defects. The faults of the current consensus model are shown to result typically from an unscientific methodology in which assumptions are held to be valid despite their incompatibility with data evidence. Smithers demonstrates examples of these faults: the Miller/Modigliani Theorem (the assumption that leverage does not affect the value of produced capital assets); the assumption that short-term and long-term interest rates, and the cost of equity capital, are co-determined; and the assumption that the decisions of corporate managements aim to maximise the present value of corporate assets ('profit maximisation') rather than the value determined by the stock market. The Economics of the Stock Market proposes a model that includes and explains the stationarity of real returns on equity, based on the interaction of the differing utility preferences of the managers of companies and the owners of financial capital. These claims are highly controversial, and Smithers proposes that the relative merits of the neoclassical synthesis and this proposed alternative can only be properly considered through public debate.
By:
Andrew Smithers (Founder Smithers & Co.)
Imprint: Oxford University Press
Country of Publication: United Kingdom
Dimensions:
Height: 241mm,
Width: 164mm,
Spine: 18mm
Weight: 480g
ISBN: 9780192847096
ISBN 10: 0192847090
Pages: 224
Publication Date: 22 March 2022
Audience:
College/higher education
,
Further / Higher Education
Format: Hardback
Publisher's Status: Active
Foreword by Andy Haldane 1: Introduction 2: Surprising Features of the Model 3: The Model in Summary 4: Management Behaviour, Investment, Debt, and Pay-out Ratios 5: Corporate Leverage and Household Portfolio Preference 6: The Growth of Corporate Equity 7: The Yield Curve 8: The Risk-Free Short-term Rate of Interest 9: Equity, Bond, and Cash Relative Returns 10: Stock Market Returns Do Not Follow a Random Walk 11: The Risks of Equities at Different Time Horizons 12: The Time Horizon at Which Investors Will Prefer Equities to Bonds 13: Changes in Aggregate Risk Aversion 14: Monetary Policy, Leverage, and Portfolio Preferences 15: Valuing the US Stock Market 16: The Real Return on Equity Capital Worldwide 17: Money and Time Weighted Returns 18: The Behaviour of The Firm 19: Corporate Investment and the Miller-Modigliani Theorem 20: Land, Inventories, and Trade Credit 21: How the Market Returns to Fair Value 22: Fluctuations in the Hurdle Rate 23: Tangibles and Intangibles 24: Other Problems from Labelling IP Expenditure as Investment 25: Inflation, Leverage, Growth, and Financial Stability. 26: Tax 27: Portfolio Preference and Retirement Savings 28: Life Cycle Savings Hypothesis (LCSH) 29: Depreciation, Capital Consumption, and Maintenance 30: Comparison with Other Approaches 31: The Efficient Market Hypothesis 32: Summary 33: Comments in Conclusion Appendices Appendix 1. The Duration of Bonds and Equities Appendix 2. The Valuation of Unquoted Companies in The Financial Accounts of the United States - Z1 Appendix 3. Measurement of the Net Capital Stock and Depreciation in the US Appendix 4. Data Sources, Use, and Methods of Calculation
Andrew Smithers is founder and director of economic consultancy Smithers & Co. He is the author of The Road to Recovery: How and Why Economic Policy Must Change (Wiley, 2013), and Productivity and the Bonus Culture (OUP, 2018).
Reviews for The Economics of the Stock Market
Awe-inspring, encompassing, convention-flouting analysis, hard stick-your-neck out empirical discoveries, and counter-intuitive hypotheses. Endlessly stimulating and intensely useful. * Avner Offer, Chichele Professor Emeritus of Economic History, University of Oxford * This is a bold book that questions virtually all the assumptions of prevailing neoclassical theory. By rejecting the concept of the representative agent , proposing instead that households and corporate management have totally different motivations, Smithers shows how finance plays a crucial role in explaining developments in the real economy * William White, Senior Fellow at the CD Howe Institute and Former Economic Adviser Bank of International Settlements * The book poses a substantial and important challenge to financial economics. It is therefore important that the book should be published and the author's views debated. * Martin Weale, Professor of Economics, Kings College London. *
- Winner of Included in the Financial Times Best Books of 2022: Economics.
