The Economics of the Stock Market

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 byincluding 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 areheld 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 thevalue 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 differingutility 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.

Winner of Included in the Financial Times Best Books of 2022: Economics.

“Awe-inspring, encompassing, convention-flouting analysis, hard stick-your-neck out empirical discoveries, and counter-intuitive hypotheses. Endlessly stimulating and intensely useful.”

Smithers was one of the few economists to warn about the internet bubble and the dangers posed by the ensuing global credit boom. His current concerns shouldn't be dismissed lightly. Edward Chancellor, Reuters Breakingviews
While comparisons with Keynes might seem overly grand, it is possible to feel a similar sense of freshness at the approach taken by Andrew Smithers in his new book. He ostensibly focuses on the stock market but the treatment is wide ranging. The book sets out to challenge a number of assumptions and results in neoclassical models... Sunil Krishnan, Society of Professional Economists
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.
The scope of The Economics of the Stock Market is ambitious and its tone quite provocative; both practitioners and academics will find this book relevant and stimulating. Javier López Bernardo, PhD, CFA

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).

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 includingthe 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 ofthese 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 modelthat 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 neoclassicalsynthesis and this proposed alternative can only be properly considered through public debate.

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