What are we to make of the recent swings in the stock market? The first thing to keep in mind is that whether people buy or sell stocks, they do it on the basis of their estimation of the future, near or distant. Among the things they take into account are the Federal Reserve’s rumblings about raising its interest rate and the approaching regulatory, antitrust, and tax climate. Anticipated change in any of these things can dramatically alter an investor’s view of a company’s prospects and prompt him to unload a stock.
Telegenic economic commentators like to talk about the economy as though it is a machine: it overheats, cools down, gains momentum, slows down, and so on. Colorful as those metaphors are, we must never forget that the economy is people. It makes a big difference whether we think of the economy as a large group of individuals or an engine. An engine is a collection of inanimate parts designed by someone to work together for a single purpose. An economy, on the other hand, describes a large group of human beings each of whom has his own life, preferences, aspirations, and purposes. A big difference indeed.
Human beings act. Buying or selling stock is action. When an individual acts, he selects an objective that he prefers over anything else he might try to achieve. In doing so, he imagines the future satisfaction from the accomplishment of his objective. What’s more, he expects to enjoy that satisfaction more than any other he could attempt to achieve. (In the case of stock, he wants the biggest return consistent with his taste for risk.) The satisfaction that he forgoes in order to achieve the one he prefers is the cost of the action; economists call it the opportunity cost.
Note some key features of human action: It takes place in time; no consequences are instantaneous. The time between act and consequences leaves room for mishaps: the future is uncertain. The cost of any action is subjective and personal. The actor imagines possible future satisfactions and chooses one. He may be wrong about the future, and he is never entirely sure what he is giving up because the opportunity forgone is never experienced.
Now what’s the point of all this? Stock markets have always gone up and down. True, but it’s time we learn something. Uncertainty is the rule. The future is never disclosed.
The least the government can do is quit contributing to our uncertainty. We must always be second-guessing it. The Federal Reserve controls the money supply. So good news–for example, a surge in growth–has to be regarded as partly bad news: the Fed might see it as a sign of “overheating” and raise its interest rate to dampen our economic activity. Or there might be hints that the government is going to hammer one of the most successful high-tech companies, sending a chill throughout that entire sector of the economy. There are a hundred and one ways that the government forces us to play. Since part of the future we must all imagine when formulating our plans includes what others are thinking, you can get an idea of how much more difficult government intervention in the economy makes things.
So what do we do? We must insist that the government keep its hands off the economy. Politicians and bureaucrats are in no position to know what they’d need to know to run the economy. They don’t know what interest rates or stock prices should be. They don’t know how much money should be in circulation. They don’t know how much business should invest in this or that. They don’t know because they can’t know. The reason they can’t know is that such things can be discovered only through the hustle and bustle of the market process, in which entrepreneurs scurry around trying to please us consumers. We let them know how they’re doing by our buying and not-buying. If those signals, carried by the price system, get through, we can rest assured that generally we’ll be well served. But if the government distorts the signals with its fiscal, monetary, and regulatory mischief, then we consumers are the worse off.
The world is full of uncertainty. The market is the best way we know to grapple with it. Every time government interferes, it plunges us a little bit back into the darkness of ignorance.