A New Macroeconomic Architecture for the Stock Market: A General-System and Cybernetic Approach

Introduction

Stock market turnover rates, yields, yield rates, and stability are indicators of the health of the economy for those countries that depend upon such a financial institution. But it is not such an important support system for an economy that does not have stock market, and does not need one. Instead they depend upon real asset pricing mechanism for measuring the economic and social standards. The stock market is then not an essential institution to act as a barometer of economic change. But these two opposite views tell a much larger story about the economic processes and their social effects. Meera (2004, p. 59) puts the emptiness of the casino barometer of a stock market and its underlying financial system in value formation in the following words: “Financial institutions create money out of nothing but lend it out of interest. This characteristic of fiat money called seigniorage is at the root of financial crisis, monetary instability, and unjustness. The fractional reserve requirement also makes possible the creation of additional money through multiple deposit creation. All this has brought about huge volumes of liquidity in the global monetary system, which is responsible for the huge asset price bubbles faced in many countries.”

To investigate into these opposite views regarding the financial system with or without stock market we note what lies behind stock market in the organization of asset valuation to protect the wealth of savers and to contribute to and reinforce the relationship that money and finance has with the real economy. Furthermore, stock market stability also requires inflation targeting and a participatory form of development model for the protection and wellbeing of the marginal savers. The ethical principle here linked with the economic objective is derived from Rawls' Difference Principle (1971) as an example. On the point of national wellbeing Rawls wrote (op cit, p. 14-15):“… inequalities of wealth and authority are just only if they result in compensating benefit for everyone, and in particular for the least advantaged members of society.” The moral theme underlying the Difference Principle is equally applicable to the purpose of financial stability and social and economic measurement of wealth. The question then stands whether stock markets can deliver such a concept of wellbeing. Likewise, we need to ask whether there is an alternative economic and socially productive activity that establishes the total wellbeing criterion for the nation.

And on this objective issue the structural changes linked with stock market and alternative financial institutions also invoke the nature of participatory role between central bank and commercial bank on the matter of money, finance and real economy complementary relationships. On this issue Mishkin (2007a, p. 55) presents his view: “First, it (central bank) should advocate a change in its mandate to put price stability as the overriding, long-run goal of monetary policy. Second, it should advocate that the price stability goal should be made explicit…. Third, the Fed should produce an 'Inflation Report' … that clearly explains its strategy for monetary policy and how well it has been doing in achieving its announced inflation goal.”

Furthermore, the issues of monetary relations involving central bank and commercial banks, and inflation targeting to stabilize prices also invoke the study of asset pricing mechanism for the common good on the wellbeing side. On this asset-pricing issue for inflation targeting Mishkin (2007b, p. 59) emphasizes the use of monetary policy for the stabilization of stock market fluctuations. He points out the importance of regulating the monetary policy effect on inflation targeting so that stock market effects on investment as a major form of spending (fiscal side) remains well maintained. Besides this there is need to maintain the transmission effect of stock market changes on household liquidity and household wealth.