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.
Author(s): Andrew Smithers
Publisher: Oxford University Press
Year: 2022
Language: English
Pages: 215
City: Oxford
Cover
The Economics of the Stock Market
Copyright
Dedication
Foreword
Acknowledgements
Contents
List of Figures
List of Tables
1: Introduction
2: Surprising Features of the Model
(i) The independence of the corporate sector
(ii) The independence of the level of savings from the portfolio preferences of owners of wealth
(iii) The portfolio preferences of wealth owners
(iv) The time horizon of business investment results in a flat yield curve at the long end
(v) There are different equilibria for short-term interest rates, long dated bonds, and equities
(vi) Equity returns are determined at the margin by the desire to maintain consumption
3: The Model in Summary
(i) Basic approach and structure of the economy
(ii) Short- and long-termfluctuations in asset prices
(iii) Long-termreturns are determined by the risk aversion of owners and managers
(iv) The risks and returns for owners and managers
(v) The stability of the real return on equity
(vi) Corporate savings vary with growth
(vii) The shape of the yield curve
(viii) The differences in return on equities and risk-free bonds
(ix) Changes in portfolio preference
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
29: Depreciation, Capital Consumption, and Maintenance
30: Comparison with Other Approaches
31: The Efficient Market Hypothesis
32: Summary
33: Comments in Conclusion
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 United States
APPENDIX 4: Data Sources, Use, and Methods of Calculation
Angus Maddison
Bank of England: ‘A Millennium of Macroeconomic Data for the UK’
Bureau of Economic Analysis (BEA)
Bureau of Labour Statistics (BLS)
Bureau of the Census
Carola Frydman and Dirk Jenter NBER Working Paper 16585
Elroy Dimson, Paul Marsh, and Mike Staunton
Federal Reserve
Jeremy J. Siegel
Office for National Statistics (ONS)
Òscar Jordà, Moritz Schularick, and Alan Taylor
Robert Shiller
Stephen Wright
Glossary
Bibliography
Index
