Well, we've made it into a new year. All the Y2K disasters that were projected for the year 2000 didn't happen after all, and even the American political system has somehow struggled on into 2001. But the past year certainly was a rocky one for the stock markets.
While stocks spent most of the year going nowhere (or worse), it's interesting that in our capitalistic, free-market system, most people don't really understand why, over the long term, markets go up. One answer is that the securities markets are simply a representation of the overall wealth of our society. So as long as the overall wealth, or the nation's total amount of goods and services produced, goes up, the stock market will continue to rise as well. So to answer the question, "What makes stock markets go up?" you must first answer the question, "How is wealth created?"
It's good to understand how markets work and how wealth |
can be created. It's better to do something constructive with that wealth
For a brilliant explanation of how wealth is created, read economist Paul Pilzer. In his books Unlimited Wealth and God Wants You to Be Rich, he explains the fundamentals of the capitalist system and how entrepreneurs create wealth. Rather than focusing on the dreary profession of economics, which is defined as the distribution of limited resources, Pilzer has studied the creation of wealth.Technology Creates Wealth
Pilzer explains that technology creates wealth by improving our ability to produce goods and services.
He provides the following illustration. Ten people live on an island and fish every day, all day long, for food. They catch just enough fish each day to feed all ten people. One day, two of the people invent a boat and a net. Using this advanced technology, these two people catch enough fish to feed all ten people.
Initially, the new technology creates anxiety among the eight other fishermen who feel they are no longer needed. However, in the spare time that they now have on their hands, they begin to do other things. One builds houses, another makes clothes, a third becomes a spiritual leader, a fourth tends a garden, a fifth becomes an artist. Because they no longer have to spend all their time fishing, the eight other people can now develop specialized skills to produce a greater variety and quantity of goods.
The net result (no pun intended) is that the new technology - the boat and the net - allowed this small group of people to produce more goods and services in total than they had before. Since they produce more, they can also consume more. That is how technology creates wealth.
This simple example of capitalism illustrates the point that technology initially creates disruption and dislocation as individuals struggle to adapt. Soon, however, they find new ways to contribute and overall production goes up.
Man created a dramatic, technological innovation when he stopped plowing the earth by hand and harnessed a horse to a plow. The discovery of fertilizer and the study of plant genetics made a tremendous impact on human life. Each technological innovation has dramatically increased our productivity and our wealth.
At the turn of the century in America, roughly 90% of the population lived and worked on farms. Today, only a hundred years later, less than 3% of the population live and work on farms. Yet this 3% not only produces food for all of America but also for hundreds of millions of people all over the world. Technology allows us to produce more with less. It is an engine of wealth creation.What Creates Technology?
The intelligent person then asks, "Okay, if technology creates wealth, what creates technology?" In answer to this question, Pilzer says that the development of new technology requires three things. The first is education. Enrichment of the human brain with specialized knowledge creates the foundation for the development of technology. Education levels are high and continue to rise in the industrialized countries.
Second is research. Basic research about the nature of the world and how things work is essential. Today, there are more scientists and engineers alive than all the previous scientists and engineers who ever lived. The amount of research in the United States is staggering. Our body of scientific and technical knowledge is continuing to double every few years.
The third critical element is communication. With educated people all around the world conducting parallel research projects and communicating their findings over the Internet, the speed of change has accelerated dramatically.
In the old days, scientists and researchers worked in isolation. When they made significant findings, they presented their work to a scholarly journal for review. If the editors of the journal considered the findings important, they published them in the journal for distribution to the rest of the scientific community. These gatekeepers provided an important service, but they also slowed down the process of information exchange.
Today, with global access to the Internet, information exchange is parallel rather than serial and there are no gatekeepers. Research can be quickly published online - the day after an experiment, the results may be available on the Internet. The information is accessible to anyone who is interested.
The bottom line is that education, research, and the exchange of information create technology. Technology creates wealth. Today, we as a society possess higher levels of education, have overwhelming amounts of research data, and enjoy an exploding communications network. According to Pilzer, since all these basic building blocks are more robust than ever, new technologies and soon after, new wealth, will continue to develop at breakneck speed.
So technology creates wealth by allowing us to produce more for less. Education and research and communication create technology. But back to our original question: "What makes the stock market go up?" The stock market is simply a reflection of the goods and services produced by our society. We've created financial instruments to represent the materials and services that are produced each year by workers. The only value in the stocks is in the productive power that they represent.
As long as we continue to introduce new technologies that allow us to produce more this year than they did last year, wealth in our society will grow.The Technology Gap
This brings us to one of Pilzer's most interesting concepts: the technology gap. The technology gap is the difference between what is known to be commercially viable and what is currently available in the marketplace. Viable commercial products are often introduced many years after the basic technologies are developed.
The technology gap is also an opportunity gap. Entrepreneurs step in to close the gap, taking technology that has been researched by others and creating profitable products and companies around them. The exciting thing about the technology gap is that it continues to grow each day. There are more new technologies being created than there are entrepreneurs to bring them to market. Rich backlogs of business opportunities are waiting for entrepreneurs to assemble their management teams, raise capital, build products, and grow their markets.
The explosion of new commercial technologies, dramatically enhanced productivity, and wealth creation will continue as far as we can see into the future because of the technology gap. Of course markets will go through their ups and downs, as we experienced last year. But over the long run, wealth and stock markets have nowhere to go but up - as long as human beings continue to question, create, and build.
For over 10,000 years of recorded history, human beings as a species have not only survived but thrived. Markets go up over the long run because human beings create value and wealth for themselves. As we move into the future, industries like genetic engineering, telecommunications, nanotechnology, high-definition TV, hybrid cars, and high-tech material sciences will be the driving new technologies.What Next?
Since wealth creation seems to be built into our system, perhaps we are asking the wrong question. Perhaps the question should be "What shall we do with it?" If the stock market can theoretically go up indefinitely, should our final goal be simply to pocket as much of the profits from our "technology gap" products as we can?
In 1975, approximately 3 billion people populated our planet. Today, only 25 years later, that number has doubled to 6 billion. As an industrialized nation, we possess the technology to create vast sums of wealth and true prosperity not just for ourselves, but for others as well. Will we choose to help other people of the world? As a society, will we redefine what wealth is for?
For the last 500 years we've used technology to enhance our material wealth. But in the future, there may be a major value shift. People may realize that they have enough material wealth. Having achieved financial wealth - and with the confidence that the stock market will continue to rise over the long run - they'll look for ways to experience the kind of happiness that isn't measured in dollar signs.
Can we now turn some of our resources to achieving peace and harmony with ourselves and within our communities? Can we create a sustainable economic system that does not rely on the consumption of our natural resources? These are much bigger questions than "Why does the stock market go up?" Maybe someday we'll find the answers to them as well.