Day-traders might say the Dow’s direction depends on the morning’s news. Pundits may cite the next winner of the Super Bowl or the political party of the next elected president. Fundamental analysts might say it depends on earnings growth. The DJIA is swayed both by economic and non-economic factors. This article estimates what portion of the Dow is economically driven and what portion is not explained by economic forces.

Editor's Note: this article is less topical than it sounds

When asked to predict activity in the stock market, J.P. Morgan replied that stock prices would fluctuate. Modern finance theory ascribes meaning to these fluctuations. The stocks of successful, well-run, or lucky companies rise. Those of unsuccessful, misgoverned, or unlucky companies fall. While portfolio managers view the volatility of individual stocks as a problem to be overcome through diversification, corporate executives watch their stocks rise or fall with euphoria or dismay. A soaring stock price helps a company grow, by raising bond ratings and bringing in more money from additional share offerings. A plummeting stock price unsettles creditors and raises the dilution cost of each dollar of new equity.

Just after the nation’s founding, Alexander Hamilton took on a banking crisis with eerie parallels to today’s,

The United Kingdom's Prime Minister David Cameron plans to create a national well-being index. French President Nicolas Sarkozy has formed a team that includes two Nobel Prize-winning economists to come up with a system for measuring the nation's well-being. In China, happiness indexes have become so popular that cities there compete for the title of China's happiest city. Many now argue that purely economic measures of a country's progress -- such as gross national product (GDP) -- fail to count many things people value highly, such as personal and community relationships or a healthy environment. To learn more about measuring happiness, Knowledge@Wharton spoke with Nic Marks, author of the e-book, The Happiness Manifesto: How Nations and People Can Nurture Well-Being.

How capitalism killed the soul of Motorola.

Mainstream media generally accepts the current commonplace institutions as fundamental features of ‘the economy’. Others with an eye on innovation, recognize that digital platforms are empowering alternative forms of economic behavior at scales never before possible. Digital currencies, reputation metrics, social capital scores, and collaborative consumption platforms are proliferating at a rapid pace. Those of us who enthusiastically explore this territory regularly confront the lack of an appropriate language with which to describe these innovations.

Clearly we need a better way to frame these concepts. What is alternative currency? What is a gift economy? What is the attention economy? How can we systematically explain the economic impact of user-generated content or peer-to-peer exchange? The terms, ‘user generated’ and ‘peer-to-peer’ might as well be defined as ‘not professional’ and ‘not corporate’, respectively.

If we are to have any hope of understanding emerging economic relationships, we must begin defining them in terms of what they are, rather than what they are not. Here is my attempt.

The market functions just as it’s supposed to, except when it doesn’t.

What exactly is the relationship between money and happiness? It's a difficult question to pin down, experts say. While more money may make us happier, other considerations -- such as whether you live in an economically advanced country and how you think about your time -- also play into the equation. An increasing number of economists, sociologists and psychologists are now working in the field, and most agree that there is a strong link between a country's level of economic development and the happiness of its people.

Textbooks say that even minuscule differences in the price of identical goods in two places should be short-lived. Eagle-eyed arbitrage traders will swoop and make some easy money. But anomalies do exist, and they often persist for far longer than theories predict. As a result, economists are revisiting theories about arbitrage – the process which should equalize prices if they get out of line

A pioneer in the field of market design, Harvard Business School professor Alvin E. Roth has helped to repair flawed market systems in fields ranging from kidney donation to high-school student placement. Key concepts include:
* Successful marketplaces must be "thick, uncongested, and safe."
* Sufficient "thickness" means there are enough participants in the market to make it thrive.
* "Congestion" is what can happen when markets get too thick too fast: there are heaps of potential players, but not enough time for transactions to be made, accepted, or rejected effectively.
* "Safety" refers to an environment in which all parties feel secure enough to make decisions based on their best interests, rather than attempts to game a flawed system.

Elements like cooperation and creativity are often central to getting the job done but are difficult to measure and even harder to incentivize. Researchers Richard Makadok and Russ Coff, professors of organization and management at Emory University's Goizueta Business School, studied the issue and developed a model that offers managers insight into how various hybrid governance structures work and can provide indirect inducements for tasks that otherwise could not be directly incentivized or measured. Their paper, “Both Market and Hierarchy: An Incentive-System Theory of Hybrid Governance Forms,” was named top paper for 2009 by Academy of Management Review.

Bankruptcy helps the undeserving—and that’s the way it should be.

Humans have evolved four priorities or "drives," according to HBS professor emeritus Paul R. Lawrence: the drive to acquire, to defend, to bond, and to comprehend. In an excerpt from his new book, Driven to Lead: Good, Bad, and Misguided Leadership, Lawrence describes how the four drives impact globalization.

Marketers have been applying behavioral economics—often unknowingly—for years. A more systematic approach can unlock significant value.

A clearer view of economics means looking beyond the invisible hand.

The impact of increases in the minimum wage has long caused controversy in political and management circles. Supporters of regular increases argue that those raises are necessary to keep working people from falling below the poverty line. Opponents contend that the increases actually prevent less qualified workers from entering the labor pool because employers can no longer afford to hire them.

Unfortunately, little data existed to support either side, until now. Recently, a Kellogg professor helped to build a model that gives an unexpected answer to the question in one particular type of situation: the service sector that employs minimum-wage workers who depend on incentive payments as part of their earnings, such as servers who receive tips and retail employees and sales staff who work on commission. In these cases, the model strongly suggests that everyone—employers, customers, employees who lose their jobs, and even those who stay—ends up in a worse situation when the minimum wage increases.

Irrationality is the focus of behavioral economists, who appear to be gaining greater credibility in macroeconomic circles since the housing bubble of 2008 and the ensuing global financial meltdown. They are also at the center of an age-old debate recently reignited by columnist and Nobel laureate Paul Krugman in a September 6 New York Times Magazine article titled, "How Did Economists Get It So Wrong?," which fires a salvo at the assumption underlying neoclassical economics -- namely, that free markets are inherently rational and efficient.

Krugman's article heaps scorn on so-called "freshwater economists" -- as typified by the University of Chicago economics faculty, whose ideas have dominated government policymaking since the early 1980s. In contrast, "saltwater economics" exhibits more openness to the ideas promulgated in the 1930s by Britain's John Maynard Keynes -- that free markets often behave inefficiently, are self-destructive and at times need corrective policy actions such as government stimulus spending. Rather than ascribing perfect rationality to markets, these economists say people and institutions often behave irrationally and often in ways contrary to their own interests.

While the debate between the freshwater and saltwater viewpoints in macroeconomics may sound academic, it has a significant impact far outside the ivory towers of universities.

Universities can help boost a mature industrial economy by reinvigorating the flow of new ideas in the community. But universities can approach this task in different ways, each leading to vastly different outcomes.

Employment growth is strongly predicted by smaller average establishment size, both across cities and across industries within cities, but there is little consensus on why this relationship exists. Traditional economic explanations emphasize factors that reduce entry costs or raise entrepreneurial returns, thereby increasing net returns and attracting entrepreneurs. A second class of theories hypothesizes that some places are endowed with a greater supply of entrepreneurship. Evidence on sales per worker does not support the higher returns for entrepreneurship rationale. Our evidence suggests that entrepreneurship is higher when fixed costs are lower and when there are more entrepreneurial people.

The Mises Institute plays the role of free market defender in a response piece to a person who does not favor free market responses. [Hat tip to FinanceProfessor.com]

The previous round of wealth in this economy was built on selling precious copies, so the free flow of free copies tends to undermine the established order. If reproductions of our best efforts are free, how can we keep going? To put it simply, how does one make money selling free copies? Kevin Kelly has an answer: When copies are free, you need to sell things which can not be copied. Well, what can't be copied? From a study of the network economy there he sees roughly eight categories of intangible value that we buy when we pay for something that could be free.

Differing beliefs lead to price drift: The standard view of how stock prices move—that investors act rationally on information and that markets are efficient—does not account for price drift. Snehal Banerjee explains that price drift may occur because investors agree to disagree about the average valuation of an asset.

Chris Anderson’s book, “Free: The Future of a Radical Price,” is essentially an extended elaboration of Stewart Brand’s famous declaration that “information wants to be free.” The digital age, Anderson argues, is exerting an inexorable downward pressure on the prices of all things “made of ideas.” Anderson does not consider this a passing trend. Rather, he seems to think of it as an iron law: “In the digital realm you can try to keep Free at bay with laws and locks, but eventually the force of economic gravity will win.” In this article, Malcolm Gladwell challenges the core assertions underlying the book.

Findings from behavioral organization theory, behavioral decision theory, survey research, and experimental economics leave no doubt about the failure of rational choice as a descriptive model of human behavior. But this does not mean that people and their politics are irrational. Bounded rationality asserts that decision makers are intendedly rational; that is, they are goal oriented and adaptive, but because of human cognitive and emotional architecture, they sometimes fail,occasionally in important decisions. Limits on rational adaptation are of two types: procedural limits, which limit how we go about making decisions, and substantive limits, which affect particular choices directly. [Hat tip to FinanceProfessor.com]

One of the root problems with business schools is that too many are infected with assumptions that reinforce and bring out the worst in human-beings. In particular, the logic and discipline of economics usually rules the roost at business schools.

Editor's Note: The comments add as much or more value as the article itself.