A Rising Stock Market Does Not Signal Economic Health

by | Dec 11, 2016

A Rising Stock Market Does Not Signal Economic Health

by | Dec 11, 2016

The headlines tell us that the Dow Jones is up around 1,000 points since Donald Trump won the election on November 8th. The conventional wisdom is that this shows how much confidence people have in Trump’s ability to generate a healthy American economy. The argument is that if people are willing to buy stock in American firms, this indicates their belief that those firms will see improving profits over the next few years. They then draw the conclusion that more profitable firms indicate a healthier American economy.

Although this argument is correct about stock prices reflecting an increasing belief in the profitability of US firms, it makes a major error in assuming that profitable firms necessarily mean a better economy.

The Economy Isn’t A Thing

First, it’s important to understand that phrases like “a healthier economy” are themselves problematic. The “economy” is not the thing we should be concerned about. In fact, in some fundamental sense there’s no such thing as “the economy.” As Russ Roberts and John Papola memorably put it in the music video “Fight of the Century:”

The economy’s not a car.
There’s no engine to stall.
No experts can fix it.
There’s no “it” at all.
The economy is us

Things are not “good/bad for the economy.” They are good or bad for the people who comprise the market process, specifically in our capacity as consumers. All the economy amounts to is people engaging exchanges in order to better satisfy their wants. What we should care about is whether or not people are able to better satisfy those wants.

And “better satisfy” here means not just more and better goods and services, but at cheaper prices too. Lower prices mean that consumers have income left over to purchase goods they otherwise couldn’t, enabling them to better satisfy their wants by satisfying more of them.

Read the rest at the Foundation for Economic Education.

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