The Economics of the Stock Market

by Andrew Smithers

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.

Genres: Economics, Finance, Nonfiction

224 pages, Hardcover

Published June 10, 2022

Reviews

[Russell Chee · Rating 2 out of 5]

honestly this feels a bit overcooked. i get that the point is to construct a robust model of the macroeconomy with financial markets that is rather self-consciously different from the neoclassical model, but i feel it runs into a couple of issues:

- it's very inductive in the sense that it seems to be shaped around explaining real-world phenomena and justifying their existence (this is of course intended to make it more plausible, but one should note that a model does not always have to be realistic to be helpful, and indeed that increased realism does not always equate to increased explanatory/prescriptive power)

- i wonder if it isn't too backward-looking? it feels often like the author is taking accepted maxims from 20th/21st-century financial data and assuming that these are the anchor of a robust model of the macroeconomy. but i question whether it afford enough space for shifts/regime changes. (e.g. he asserts that the MM proposition does not hold, but is that really theoretically true, or is this a historical anomaly? i think this and other points are worth interrogating further) it's a very 'stylised facts' model of the economy.

- i am also admittedly slightly put off by the tone of the book, which is both slightly self-satisfied in its provocativeness (current models are totally wrong, i am right ... etc) and often glosses over complex macroeconomic concepts that would be worth explaining in detail.

but nonetheless an interesting attempt to rethink the structure of the macroeconomy, though i think rather less provocative than the author seems to believe.

[Allen · Rating 4 out of 5]

Very difficult read but worth the effort. Mr. Smithers has made some of these arguments in earlier books, for example reversion to mean rates of return on capital. Data presented reminds investors how slow the process of mean reversion can be.

[Miguel Ureña · Rating 2 out of 5]

Some might say that in order to read this book you must be an economist by trade. I believe that one does not have to be a chef in order to judge another chef's dish. As a simple home cook I can say that this dish has a good base but is overcooked.