SYNOPSIS: Wonders why a simple weighting of a few stocks is considered so important

Early in his forthcoming book, "Irrational Exuberance," Robert Shiller -- who has done more than any other economist of his generation to document the less rational aspects of financial markets -- describes the full-page advertisement that Merrill Lynch ran a year ago, when the Dow Jones industrial average passed 10,000. "Even those with a disciplined long-term approach like ours have to sit back and say 'wow,' " the ad declared. And the accompanying stock market chart bore the caption "HUMAN ACHIEVEMENT."

In the year to date, however, blue-chip investors, battered by interest rate fears, have experienced more ow than wow. On Friday the Dow zipped through 10,000 again, this time heading the other way. Will we soon see another chart, with the caption "HUMAN FAILURE"?

O.K., O.K., the Dow is still more than 50 percent higher than it was in December 1996, when Alan Greenspan tried unsuccessfully to dampen our exuberance. And other stock indices have not felt the Dow's pain: the broader S.&P. 500 index is still well above its level of a year ago, while the Nasdaq -- whose heavy weighting of tech stocks has made it the unofficial bellwether of the "new economy" -- keeps setting new records.

But that divergence of fortunes is very much to the point: although the chatter is all about Mr. Greenspan's next move, the question this market really poses is, Who will own the future?

The very fame of the Dow tends to make us forget that this is even a question. In Steve Bodow's hilarious 1997 Slate article "Dow te ching," one of the koans reads: "The Dow does not exist, yet all things exist within it / O.K., only 30 stocks exist within it / But it seems like a much bigger deal." It is common practice to speak loosely of "the Dow" when we really mean "stock prices in general" -- I've done it myself -- and many people compound that looseness by talking as if the Dow stocks represented a claim on the future earnings of corporate America. But they don't: if you buy the Dow, you only buy a claim on the future earnings of the companies currently in the index.

That's not a trivial distinction: to be bullish on the Dow you must believe not just that American capitalism will prosper, but that today's corporate giants will share proportionately in that prosperity -- not just for the next couple of years, but far into the future. And I mean far. To take an extreme example, the calculation that underlies last year's best seller "Dow 36,000" assumes that the earnings of today's Dow companies will grow as fast as overall corporate profits forever; and half of what the authors believe to be fair value comes from projected earnings after the year 2070. (Actually, even then you don't get 36K -- more like 20 -- but never mind.)

So do you believe that 70 years from now the Dow companies -- not the companies that will be in the Dow then, but the companies that are in it right now -- will capture the same share of corporate profits that they do today? The investors bidding up the Nasdaq, not to mention those buying into I.P.O.'s, clearly don't. They believe that has a good chance of being tomorrow's Microsoft, and correspondingly that today's General Electric -- or even today's Microsoft -- may be tomorrow's Sears, Roebuck. To be a serious Dow bull, you must believe that the new economy will belong to old companies; to justify the price of tech stocks, you must believe that the future belongs to the upstarts. Both beliefs can't be right.

Both could, on the other hand, be wrong. Mr. Shiller believes that the whole stock market, not just the Dow, is inflated by a speculative bubble. I'm sympathetic but not entirely convinced. The social and psychological hallmarks of a bubble -- like the fact that the TV in my local greasy pizza place is now tuned to CNBC, not ESPN -- are plain to see, but so is the spectacular pace of technological progress. I'm not sure that the current value of the Nasdaq is justified, but I'm not sure that it isn't.

In any case, the fall in the Dow is not a verdict on the economy as a whole. As long as we have full employment and low inflation, I say let the blue chips fall where they may.

Originally published in The New York Times, 2.27.00