The recent global financial crisis has made the inadequacies of the scientific state of economics and finance glaringly obvious, as these disciplines gave the false reassurance that such a self-destructive phenomenon could not happen. A similar phenomenon arose in the 1930's, when the pitfalls of the dominant economic theories were sharply exposed. Since then, the same analytical framework, in its new versions, has revealed a huge number of other empirical and experimental failures. On the other hand, the founders of the currently dominant theories in economics and finance (i.e. the standard paradigm) such as Walras (1834-1910), Modigliani (1918-2003) and Miller (1923-2000) have identified mathematical contradictions within their own foundational models, the root cause of which no one has yet discovered. The standard paradigm has thus lost the reason for its existence in the light of experience, experiments and logical rigour. This book identifies the heuristic cause of these external and internal contradictions of the standard paradigm and remedies these problems by offering a new paradigm which can explain and predict observed economic behaviour, and resolve the extant behavioural, empirical and experimental puzzles. The new paradigm offers a dramatically improved understanding of economic behaviour at the micro as well as macro level of the economy within an over-arching framework comprising the real and the financial sectors. It does so in a rigorous but simple and clear way, using an axiomatic approach. It also offers policy recommendations on how the economy should be managed to avoid severe swings. It therefore is of great interest to scholars and practitioners in economics and finance.
List of figures List of tables Preface List of abbreviations and acronyms 1 Introduction 2 Irrational foundations of 'rational' behaviour in the standard paradigm 2.1 Foundation of 'rational' individuals' behaviour 2.2 Foundation of 'rational' pricing theory 2.3 Use and abuse of mathematics in economics and finance 3 Contradictions of the Marxian paradigm 4 The new paradigm 4.1 Common ground with existing literature 4.2 Our assumptions on economic behaviour, friction and liquidity 4.3 Fundamental assumption of the new paradigm and its implications 4.4 Role of money, reason for its existence and its time-value 4.5 Multi-pricing in efficient, frictionless and competitive markets 5 Resolution of puzzles in microeconomics 5.1 Puzzles of theory 5.2 Puzzles from experience and experiments 6 Resolution of puzzles in finance 6.1 Capital structure and debt-capacity 6.2 Dividend policy and excess volatility of share prices 6.3 Corporate control premium, discount to full net asset value and winner's curse 6.4 Alternatives to Markowitz's portfolio theory 6.5 Foundations of the accounting 'identity' 7 Resolution of puzzles in macroeconomics 7.1 The new macroeconomic model of the economy 7.2 Reasons for the emergence of endogenous imbalances 7.3 Banks in the new model 7.4 Reasons for the emergence of endogenous macroeconomic swings 7.5 Pricing of risk during imbalances 7.6 Consequences of Central Bank decisions 7.7 Uneven economic development within the same economy 8 Economic role of the State 9 The recent global financial crisis 9.1 Excessive loan growth scenario and its aftermath 9.2 International dimensions of the recent global financial crisis 9.3 Authorities' handling of the early signs of the crisis 9.4 Authorities' handling of the crisis and its aftermath 9.5 Minimizing further damage from the crisis in the Euro-zone 10 Conclusion, policy and research recommendations 10.1 Conclusion 10.2 Policy recommendations 10.3 Future research Appendix 1 A review of some of the academically more popular paradigms Appendix 2 A review of some of the academically less popular paradigms Appendix 3 Existing literature on resolution of puzzles in corporate finance List of commentators List of institutions Bibliography Index
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