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Financial socialism: The role of financial economics in economic disorganization

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  • Ehret, Michael

Abstract

A growing body of research shows evidence that financial economics played a significant role in recent financial crises, such as the subprime mortgage crisis, Enron and Long-Term Capital Management. This track record is a wake-up call for managers and investors who employ financial economic models. This paper demonstrates how financial economics decouples market prices from the valuation by customers and resource owners in a systematic way. As an organization principle, financial economics replaces value-driven investment by a theory-driven ruling of anonymous financial markets – a scenario warranting the title “financial socialism”. Implications for customer valuation, financial accounting, and a maxim for the sound application of financial economic models are presented.

Suggested Citation

  • Ehret, Michael, 2014. "Financial socialism: The role of financial economics in economic disorganization," Journal of Business Research, Elsevier, vol. 67(1), pages 2686-2692.
    • Handle: RePEc:eee:jbrese:v:67:y:2014:i:1:p:2686-2692
    DOI: 10.1016/j.jbusres.2013.03.017
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