The preface of “Dynamics of Markets” by Joseph L. McCauley

While in China I was able to purchase a wide variety of graduate level textbooks for a low price, and one of the books I procured is “Dynamics of Markets” by Joseph L. McCauley, University of Houston. The first paragraph of the preface of the book was a thumping read, and goes as follows:

“This books emphasizes what standard texts and research in economics and finance ignore: that there is as yet no evidence from the analysis of real, unmassaged market data to support the notion of Adam Smith’s stabilizing Invisible Hand. There is no empirical evidence for stable equilibrium, for a stabilizing hand to provide self-regulation of unregulated markets. This is in stark contrast with the standard model taught in typical economics texts (Mankiw, 2000; Barro, 1997), which forms the basis for the positions of the US Treasury, the European Union, the World Bank, and the IMF, who take the standard theory as their credo (Stiglitz, 2002). Our central thrust is to introduce a new empirically based model of financial market dynamics that prices options correctly and also makes clear the instability of financial markets. Our emphasis is on understanding how markets really behave, now how they hypothetically “should” behave as predicted by completely unrealistic models.

Wow, what a way to start a book. While I have only just began reading the book, this is definitely one of the most powerful if not the most powerful message delivered in the preface of an academic text I have ever read. The author goes on in the preface to identify, for example, that empirical evidence strongly suggest that the standard utility based model of macroeconomics is flawed (a fact he attributed to Keen, 2001). 

The basic notion of the book, that theories of finance and economics be based on empirical evidence instead of academic dogma, seems to be something that is radically different  from what can be observed to be standard procedure of many regulatory agencies. That regulations and reforms have failed to happen in a significant way since the 2008 financial crisis ushered in by the Lehman Brothers filing for bankruptcy, is testament to this perception. For that alone, I am convinced that the book is worth the time to read.


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