Macroeconomics with Firms and Stock Markets

Empirical work on stock market data, coupled with behavioural findings on corporate decision-making, have produced a set of challenges for orthodox macroeconomics. This paper critically considers the work of Andrew Smithers and related contributions, the insights from which have largely been ignored in consensus economics. Key features of this alternative framework are a rejection of efficient markets; a distinction between market and fundamental value of assets; the need to consider multiple financial assets; perverse effects of managerial compensation; the heterogeneity of economic actors; and behavioural theories of corporate decisions. The way that these facets are unified in a coherent critique marks Smithers out as an original thinker. But his work should also be seen in the context of past and contemporary authors who have attempted to incorporate firms and shareholders into economic theory. Despite the broad historical sweep of his work, Smithers has surprisingly little to say about political economy. Apart from references to executive compensation, his account does not differentiate much between the managerial capitalism and the era of shareholder value that has characterized major Anglophone countries since the 1980s. The result of this is that doubts remain over elements of his theory and that some policy implications are uncertain or unexplored.