The stock market exists to discharge the gap between capitalism and reality. To a greater extent than capitalism’s most dedicated enemies imagine, whether a company is in the red or in the black, whether it is getting by or flourishing, is a matter of convention. The bottom line is like the horizon: exact, but it changes with your perspective. Accounting is an etiquette, not a science: the principles of accounting are accepted, not discovered. And because (in the short definition of capitalism) business can run as well on credit as cash, any large aggregation of capital that is not openly burning money remains viable as long as it remains credible.
The purpose of the stock market is to assign, to the companies that submit to its judgment, another value besides the one that stands on paper: one that answers not the accountant’s abstract question, “What is it worth?” but the more cogent and interested question, “What is it worth to me?”
Capitalism did not invent the bubble. Sri Lanka, I have just been reading, is covered in the massive ruins of an ancient irrigation network that was abandoned just as it was finished. The most parsimonious explanation is that ancient Sri Lanka had a bubble in aqueducts. Perhaps the answer to why the Maya built so many splendid cities, and then abandoned them, is a bubble in the building of splendid cities. Egypt had a bubble in tombs; Rome had a bubble in conquest; Europe had a bubble in chivalry. Bubbles are a human failing; capitalism is unique because it pops them.
The stock market is this sensitive needle. Its ticks transcribe the quick ebb and flow of an argument conducted in the binary code of short and long, buy and sell. And this is an argument to which we are all parties. Whenever you spend money or time you express an opinion about the economy. Buying a car is saying “Car prices are fair.” Getting an education is saying “My prospects are good.” Planting a food garden is saying “Food prices are too high.” (Of course you may have other motives, but the economy is touchy and takes everything personally.) The stock market is the great bookie who takes these opinions about the economy and turns them into bets.
To put it another way: the stock market is an arrangement that pays people for being right about the future. This is unusual. Elsewhere in life, being right about the future is punished twice: before, with contempt; after, with hatred. But with the stock market, the more unlikely the prediction – the longer the odds – the greater the payout. Thus, as the belief behind a bubble becomes more unquestionable, the reward for questioning it grows. 1929 was the year it became worthwhile to wonder if an upward trend in earnings really meant endless future growth; 2007 was the year it became worthwhile to wonder whether the housing market really could continue to grow forever without ever slowing down.
Crude as it is, this mechanism of homeostasis is unique; and it is what makes the gross, awkward, grasping, adolescent behemoth of capitalism fecund and invulnerable.
