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A Rising Stock Market Does Not Drive Economic Growth
Frank Shostak

Many people believe that a general increase in stock prices is an important factor in economic growth. However, this is a questionable observation.

The view that the stock market drives economic growth originates from the observation that changes in stock prices precede changes in economic data. We suggest that various economic indicators are heavily influenced by money supply, which also drives stock prices.

The price of something is the amount of money asked for per unit. When an increased money supply enters a market, more money is being paid for those goods, which means the prices of those goods have increased. Furthermore, when money is increasing in supply, it does not move instantly to all markets. Instead, it moves from one market to another with time lags. Furthermore, the time lag for changes in stock prices is shorter than the time lag from changes in money supply and economic activity.

Consequently, after a time delay, the effect from changes in money supply is manifested first in the changes of stock prices even before changes in economic activity emerge.

Therefore, given that situation, the common belief is that the stock market drives the economy. If, however, the money time lag were shorter with respect to economic activity versus the stock prices, then one would have concluded that the economy drives the stock market, not the other way around.

Clearly, observing is not explaining. Despite the observation that stock market changes lead changes in the economy does not mean that the stock market drives economic activity.

Can a rise in investors’ optimism because of stock price increases cause a further strengthening of stock prices? In the absence of increases in the money supply, an increase in stock prices will divert money from other assets, thus pushing the other asset prices’ momentum lower.

Could an increase in stock prices facilitate the strengthening of the economy? For this to occur, increases in the stock prices must cause an expansion in the economy’s capital infrastructure, which would enable the increase in the production of goods and services. According to Ludwig von Mises in his book Human Action, “Stock speculation cannot undo past action and cannot change anything with regard to the limited convertibility of capital goods in existence.”

Hence, when experts claim that a particular factor is important in lifting economic growth, one must examine that factor’s relation to the pool of savings. Does the factor provide support or undermine savings? Following this reasoning, we can suggest that a rising stock market does not expand the pool of savings and, therefore, cannot generate positive economic growth.

What about the view that a stronger stock market makes individuals more optimistic about the future? This in turn, it is believed, strengthens the demand for goods and services and strengthens economic growth.

It is not individuals’ psychological disposition that determines whether their demand can be fulfilled, but whether they possess an adequate quantity of means. Someone can be very optimistic about the future, but without enough means, he cannot obtain the goods he desires. Improved psychology does very little to lift economic growth without the support of savings.

Furthermore, central bank monetary policies undermine the pool of savings which, in turn, will undermine wealth generation and real economic growth. Notwithstanding the popular view that increasing the money supply accelerates economic growth, money by itself cannot do this. More money cannot replace savings and anything that depletes savings undermines economic growth.

According to Richard von Strigl in his book Capital and Production,

Let us assume that in some country production must be completely rebuilt. The only factors of production available to the population besides laborers are those factors of production provided by nature. Now, if production is to be carried out by a roundabout method, let us assume of one year’s duration, then it is self-evident that production can only begin if, in addition to these originary factors of production, a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year. . . . The greater this fund, the longer is the roundabout factor of production that can be undertaken, and the greater the output will be. It is clear that under these conditions the “correct” length of the roundabout method of production is determined by the size of the subsistence fund or the period of time for which this fund suffices.

Increase in the Money-Driven Stock Prices and Wealth

Some economists believe that an increase in stock market prices due to easy money policies increases wealth. This increase in wealth then helps boost overall spending in the economy which, in turn, supposedly expands overall production of goods and services.

However, increases in stock market prices because of easy monetary policies cannot boost the overall wealth in the economy. On the contrary, the easy monetary policy weakens the process of wealth generation by depleting the pool of savings. When these policies increase the money supply, they set in motion an exchange of nothing for something, savings from wealth generators to non-wealth-generating activities.

Central Bank Policies Cause Investors to Commit Erroneous Decisions

Historically, the market selected money such as gold, and in the absence of central banks, an increase in stock market prices will reflect the increase of the pool of savings and lead to economic growth. Note, however, that the increase in economic growth is not because of higher stock market prices but because of the growth in savings.

This is not the situation regarding the present surge in stock prices. The emergence of the bull-bear markets within the present monetary system is in response to the central bank monetary policies that set the menace of the boom-bust cycles. Any monetary policy, whether easy or tight, is bad news for the process of savings generation. Central bank policies inhibit the investor’s ability to distinguish wealth-generating activities from non–wealth generators, creating financial bubbles and resulting in erroneous investment decisions.

By being unable to identify genuine wealth generators, investors become gamblers with the stock market as a casino. Theories such as the efficient market hypothesis argue that it is futile for investors to attempt to identify wealth generators versus non–wealth generators. In fact, Burton Malkiel, one of the pioneers of the efficient market hypothesis, has even suggested, “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the expert.”


Popular thinking claims that a rising stock market increases economic growth, something that is questionable. Without improvement in the capital infrastructure irrespective of the state of the stock market, it is not possible to strengthen the economy.

The disruptive fluctuations of the stock market labeled as the bull-bear markets are the result of the monetary policies of the central bank. These policies undermine the process of savings generation and turn the stock market into something resembling a gambling casino.





Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies.

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