What’s Wrong with the Stock Market?

What’s wrong with the stock market, particularly the New York Stock Exchange and the Dow Jones Industrial Average? The most significant problem facing the stock market is really a confluence of two problems: 1) we have too little middle class wealth, and so too little consumer demand, and 2) we face an urgent need to accelerate the transition to a new economy, but we are focused on trying to revive an old economy.

On Thursday, August 4, the Dow Jones Industrial Average dropped almost 513 points, losing 4.3% of its total value, the worst one-day decline since December 2008, and an effective reversal of 8 months’ worth of gains. It happened two days after the United States avoided a default by raising the debt ceiling and cutting government spending by about $250 billion per year over the next 10 years.

Analysts differ over whether the massive stock sell-off is attributable to concerns about an impending default by Italy, or whether it indicates some sort of deep weakness suddenly revealed in the dealings of American banks. What is evident, however, is that with massive cuts in government spending planned, the nation’s leading industrial corporations may lose needed funding and/or incentives for new investment.

The Dow Jones Industrial Average measures the collective value of 30 leading publicly traded industrial corporations. It is rooted in a 19th-century industrial economic model, in which the value of these firms grows as the wider economy is developed. In a fully developed post-industrial economy, connected at countless points of contact to a global marketplace, and driven by consumer behavior, there are obstacles to modeling economic health in this way.

But beyond the power and relevance of the Dow Jones Industrial Average, stock indices in general are prone to certain inherent flaws that can incentivize the slowing or even reversal of trends that would be healthy for the overall economy. This is because they favor already powerful entities, and are often ill equipped to measure or reward activities that substantially disperse wealth creation.

Stock indices are at best an indirect measure of capital decentralization, because they measure its centralization, albeit in a way that could, if all other conditions are right, result in more people gaining access to the levers of capitalization and wealth creation. In other words, the best-case scenario is: if everyone gets in, and makes the same bets, and most people keep up, then maybe most people get richer. But that is not the point, and the indices don’t even attempt to tell that story.

When banks come to depend on the commonly held belief that they control wealth that does not in fact exist, the possibility of wealth being decentralized in a way that drives consumer spending is greatly reduced. It has to be, because to meet the demands of their own fictional wealth claims, banks must persuade others, i.e. many or most people, to take on unsustainable debt.

Ultimately, this practice drives the deployment of still more unsustainable debt, and deprives consumers of too great a portion of their wealth, cutting into economic output, slowing economic growth and impeding hiring. This is where we find ourselves, and the banks, investment firms and major industrial corporations, are sitting on massive real wealth, waiting for government to somehow force consumer spending higher.

But the summer of 2011 has seen two worrying trends that make it less likely government can motivate new growth: the United States has committed to removing $2.5 trillion in government spending from the economy, over ten years, and multiple eurozone countries appear closer to default than before the US debt ceiling debacle.

Austerity plans in the US and the EU now threaten to destabilize major western commercial markets, even as investors grapple with the shift toward more volatile consumer markets in Brazil, Russia, India and China, sometimes grouped together as the “BRIC” bloc. Much conventional industry is still heavily invested in mineral fuels, a dependency which could lead to cost swings so severe as to limit investment of even huge pools of cash in reserve.

So, what is wrong with the stock market? It is viscerally linked to trends that no longer support sustained unlimited expansion. The fabric of our global economy, and the technologies and innovations that make it work, have evolved so far as to work, in many ways, against the continued expansion of the specific values counted by the various stock indices, given the way they are counted.

We need a more astute, more precise, more direct and versatile way to read the economic landscape that offers up the best opportunities for investment. We need to consider and then to integrate into our planning and our value judgments real measures of generalized quality of life, corresponding to household autonomy, individual career choice, and opportunities for asset building and middle-class entrepreneurship. And then we need to find ways of measuring these indicators that actually drive the underlying economic reality to improve.

We need to remember that not everyone trades stocks and bonds for a living, not everyone is hoping banks and insurers can continue to reap major profits without providing consumer-centered service, real wealth expansion and a more resilient foundation for sustained prosperity, and not everyone is served by a system that focuses on concentrations of wealth near the top of the income ladder.

We need to stay global in our thinking, and make sure we are inspired by the aim of building a robust, democratic society; the middle class will thrive if we do.