Economists overvalue stock markets

English: diagram of keynesian macroeconomic mo...

English: diagram of keynesian macroeconomic model (no idea what it is really called in English) Deutsch: Keynesianisches Totalmodell (Photo credit: Wikipedia)

By Edward Hadas – Market researchers have produced a mountain of studies, but they rarely consider the macroeconomic, ethical and social meaning of equity investing.

For the economy as a whole, changes in individual stock prices are basically irrelevant. The companies receive no cash when existing shares trade hands, whatever the price. The trading shareholders may have gains and losses, but they cancel each other out. The net economic effect of frenetic stock markets is zero.

I’m sure Fama and Shiller deserved their prizes. Shiller, in particular, has shown that the whole stock market can be overvalued – a helpful indicator of excess in the financial system. But far too much attention has been paid to the search for relative outperformance, which amounts to an economically pointless effort to gain an elusive and potentially unethical edge. more>

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