Turn on CNBC, go to Yahoo Finance, or read the Wall Street Journal, and one of the most published (and sought for) indicators is the Dow Jones Industrial Average. Another is the S&P 500, along with the Nasdaq. Why is this? Is everyone who follows this number invested in the market? No, but the ups and downs of all of these indices are assumed to be a proxy for the ups and downs of the US economy. If the Dow Jones Industrial Average (DJIA) is climbing, commentators are happy. If the DJIA is losing points, however, it’s reported as bad news. Same with the S&P 500 and the Nasdaq. Is this logical?
The S&P 500 is composed of 500 companies with large market capitalization in the US, and is chosen by committee. Is is the second most followed index in the US (and possibly the world) after the DJIA, which is a composite of 30 large, publicly owned companies, also chosen by committee.
For those of you who think it might be odd that a collection of only 500 companies, let alone 30, could represent the whole economy, you’d be correct. In fact, in recent years Small and Medium Enterprises have been growing in number and are representing more and more jobs and a bigger slice of the economy. So, if over 80% of jobs are in companies that are considered SME’s and aren’t even public, why do we care so much about these indices?
The answer lies in our need for a locus of order and control. If we can equate 30 companies with the health of our economy, it is a neat and simple solution to a messy and complicated situation. It is interesting to note that this is often the same reason conspiracy theorists have their beliefs: it is easier to know someone, somewhere, is in control, than to accept randomness and chaos.
Before dipping into murky waters of psychological babble, we’d like to come back to the original idea behind what the DJIA and S&P 500 are supposed to represent, but tweak it for reality. If, (as the Economist said the Kauffman Foundation reported), nearly all job creation between 1980 and 2005 took place in firms that were less than five years old, shouldn’t we be following these sorts of entrepreneurial companies instead? Well, there is one new index that does: The Global Entrepreneurship Development Index, or The GEDI. This, as its name suggests, is a global index and divided by country (71 in total), identifying the most entrepreneurial, as well as bottlenecks impeding growth in each country. Denmark is ranked first, the United States is second, and China and India are very low on the list.
Unfortunately, for now the list is not free and is published only once a year, so chances are that CNBC and Yahoo Finance will continue monitoring 30 large companies which are of no consequence to our lives.
You can buy the Global Entrepreneurship Development Index on Amazon here.