Use access key #2 to skip to page content.

Time to clear up some misconceptions

Recs

14

May 16, 2011 – Comments (29)

This is something that I've tried to explain to fellow Fools before. Maybe (probably) Bob Murphy explains it better.

http://mises.org/daily/5289/Is-Insider-Trading-Really-a-Crime 

29 Comments – Post Your Own

#1) On May 16, 2011 at 3:10 PM, TMFAleph1 (95.32) wrote:

I'm sure you did a better job. That was awful; his attempt to conflate speculation and insider trading is very weak.

Report this comment
#2) On May 16, 2011 at 3:10 PM, whereaminow (< 20) wrote:

Murphy rules.

There is a great defense of insider trading in Garet Garret's The Driver.

Davd in Qatar

Report this comment
#3) On May 16, 2011 at 3:11 PM, whereaminow (< 20) wrote:

Alex,

Well I certainly felt safer at night when Martha Stewart was behind bars (of course, she was only found guilty of the non-crime of lying to a tax feeding government welfare chump).

David in Qatar

Report this comment
#4) On May 16, 2011 at 3:20 PM, TMFAleph1 (95.32) wrote:

I don't know why you're bringing up the Martha Stewart case up. As you yourself note, she wasn't convicted of insider trading. That there are examples of the government abusing its authority by improperly charging citizens with other crimes does does not in away support the notion that insider trading shouldn't be a crime.

Report this comment
#5) On May 16, 2011 at 4:13 PM, whereaminow (< 20) wrote:

If there is no victim, there is no crime.  As Murphy points out, Raj committed several offenses that would have been violations of property rights had contractual agreements between voluntary consenting parties been in existence.  Insider trading, in and of itself, is not a violation of property rights and is not an exercise in fraud.  It is a non-crime. 

It is only illegal so that the government can use it as a pretext to intervene in the market to assign winners and losers.  In fact, this point was laid out dramatically in Garret's The Driver almost one hundred years ago.

Like a great many other things in economic and legal theory, this knowledge is lost and is now replaced with the idea that legality is morality, that state power is justice.  Clearly this is nonsense to a thinking person.

As for Martha, her case merely highlights the immoral nature of the State.  It should serve as a warning to a thinking person that state power will be used arbitrarily, since all state power is arbitrary.  Property rights, liberty, justice, morality, social norms, cultural values, etc.  None of these are factors in the state's equation.  More power or less power is the choice.

In order to have such a system, you need certain types of people:

The uneducated masses that cheer power no matter how or why it is used. They wave flags and sing songs. 

The undereducated and poor, because you need someone dissatisfied enough to point a gun at his fellow human being for reasons he doesn't need to understand.

The half educated, who have just enough college economic training to learn that the state is wise and just, while the market is vicious and evil.  They don't need to bother themselves with crackpot theories like the gold standard and property rights and insider trading from a libertarian perspective.  They simply need to revere the state and repeat the economic nonsense that has been poured into their head.

And then they have to be told over and over how important it is to be a critical thinker.

David in Qatar

Report this comment
#6) On May 16, 2011 at 5:14 PM, ikkyu2 (99.14) wrote:

I take issue with his explanation of the 'victimless' nature of the crime. 

When the guy who overhears inside info in a bar goes to put in his 1,000 share buy order - between the time he's overhearing, and the time he gets his cell phone out of his pocket to call his broker - the only way that sellers aren't harmed is, if in that time period, every seller with an order on the order book is informed of the new information and its full ramifications and asked to reconsider their sell order.  Your article handwaves this off as "they were going to sell anyway."  Well, maybe they were.  Maybe they weren't, though.  Maybe they looked at the stock, thought "this stock has had no good news in forever, I guess reluctantly I will sell," but in reality if they'd had access to insider information they would not have sold; or they would have sold only at a higher price.  These people are on the wrong side of the information asymmetry and they are harmed because they made a decision based on imperfect information.

In reality all that is asked by the regulations is that buy and sell decisions be made only on the basis of information that is publically available to all.

If this condition is not met, by the way, the price-setting function of a free market is distorted and stops working correctly, losing one of the main benefits of a free market system.

Report this comment
#7) On May 16, 2011 at 5:24 PM, TMFAleph1 (95.32) wrote:

ikkyu2,

Don't fall for this: David is satirizing a libertarian position (which actually does his cause a disservice by muddling the issues.)

Alex Dumortier

Report this comment
#8) On May 16, 2011 at 5:25 PM, rfaramir (29.33) wrote:

 

Dr. Murphy slightly mixes up civil and criminal offenses, but is clearly right otherwise. [In the section starting with "For example, in 2008, Rajat Gupta, a board member at Goldman Sachs, apparently told Rajaratnam". Rajat dispensing insider knowledge should be a civil offense against the company that employed him (GS). Rajaratnam's acting on that (or any other) knowledge he has should not be illegal in any sense. Murphy says this "would probably be criminal in a laissez-faire world," but I disagree.]

 

He hits it out of the park with this gem: "Suppose someone had been planning on buying shares of Acme, but just before doing so, he caught wind of a bad earnings report. In light of the new information (which was not yet public), the person refrained from his intended purchase. Should this person be prosecuted for insider non-trading?"

 

Let me extract some great links from the fine article:

http://mises.org/daily/2381/The-Social-Function-of-Stock-Speculators

Insider Trading by Stanislav Dolgopolov, a John M. Olin Fellow in Law and Economics at the University of Michigan Law School: http://www.econlib.org/library/Enc/InsiderTrading.html

Alex Padilla's 2003 dissertation: http://blog.mises.org/784/alex-padillas-phd-dissertation-defense/

Murray Rothbard, chapter 50 of Making Economic Sense: http://mises.org/econsense/ch50.asp

 

Isn’t it great having great books online completely free (http://mises.org/resources/899/Making-Economic-Sense) and available in better-reading dead-tree editions, too? (http://mises.org/store/Product.aspx?ProductId=283&utm_source=Resources)

Rothbard “was no academic snob; he believed, like Mises, that economics was the business of everyone.”

 

Report this comment
#9) On May 16, 2011 at 7:05 PM, Valyooo (99.47) wrote:

I know this isn't a well thought out intricate point...but it is something I want to add.  What if a news article was "public" but I didn't see it on yahoo finance or google finance? l never saw it before I made a decision...how public is public? How do you define public?  How many people need to know it before it is public?

Report this comment
#10) On May 16, 2011 at 8:21 PM, devoish (96.28) wrote:

David tells me the "State" flatters me if I am a sucker for their propaganda.

And then they have to be told over and over how important it is to be a critical thinker.

Thanks for warning us thinking persons not to fall for that trap.

Like a great many other things in economic and legal theory, this knowledge is lost and is now replaced with the idea that legality is morality, that state power is justice.  Clearly this is nonsense to a thinking person.

Best wishes,

Steven

 

Report this comment
#11) On May 16, 2011 at 8:26 PM, GameTheSystem (99.17) wrote:

"I know this isn't a well thought out intricate point...but it is something I want to add.  What if a news article was "public" but I didn't see it on yahoo finance or google finance? l never saw it before I made a decision...how public is public? How do you define public?  How many people need to know it before it is public?"

It is a good point though. For example, although it's not "insider trading", one might buy underfollowed stocks on news not recognized by the market. If the market takes a while to recognize the change, does it matter if the information is "public" or "private" by some arbitrary definition? (It's not always the case, but the point is that determining whether something is "insider information" is not always possible or important.)

 

Report this comment
#12) On May 16, 2011 at 11:28 PM, Starfirenv (< 20) wrote:

Clever D- greetings, but I would raise a couple points. So, "they would have sold it anyway".  The real question should be, if they had the same non-public, inside info, would they sell anyway knowing a 50% pop was about to happen?  I don't think so.

If you have a full poker table and one player knows the flop and the river, Does it make the game more efficient? Would the other players have played it the same (or at all) had they known?  It's easy to say they would have lost anyways (statistically speaking- 8 players/ one winner). Is that making the game "more efficient"?

Further, the article states that the "inside info is shared" thru a purchase by an insider. Does one simply see a buy/sell or does one learn the the insider info was based on a conversation with a cousin who is the CFO who intimated that revs blew up, the court case is unwinable and the CEO is being charged with bribery, fraud and was just served with a Wells notice? That's what I would call sharing info.

It's really about keeping a level playing field and insuring there is no unfair competitive advantage isn't it?

Ok, lets say a flock of chickens were about to cross a road and only one knew of the truck coming. Well, one might argue, they would have crossed it any way... lest they'd known.

Is steroids an unfair competitive advantage or is it good for making the game "more efficient"?  Is that a victimless crime? Can one make themself a victim?

rfaramir raises a good point and I would say yes, it goes both ways but burden of proof is tough (impossible) when you are arguing why something never happened. Good food for thought but I guess I beg to differ.   Best

Report this comment
#13) On May 17, 2011 at 2:09 AM, whereaminow (< 20) wrote:

Alex,

When you come up with an original thought, let me know. It will be your first.

Don't you have charts to stare at?

David in Qatar

Report this comment
#14) On May 17, 2011 at 2:16 AM, whereaminow (< 20) wrote:

Steven,

Say what you mean and mean what you say. Don't be coy. It just makes you look like you enjoy being the Bottom.

David in Qatar

Report this comment
#15) On May 17, 2011 at 2:39 PM, mtf00l (49.87) wrote:

rfaramir,

Your Kung Fu is strong... =D

I'm a fan of strong oppinions it shows those that have them have conviction, right or wrong.  This is not in reference to you.

That said, when you bring logic to the table... Wow!  Well posted!  That's a compliment!

Is it valid, though logical, to say the not of something makes the inverse equally valid?

As an interesting read;

http://en.wikipedia.org/wiki/Negative_and_positive_rights

Looking forward to reading more!

Report this comment
#16) On May 17, 2011 at 3:32 PM, devoish (96.28) wrote:

David.

In this reply you are the true flatterer of empty headed thought even as you declared Government the flatterer of vacuous thinkers.

Best wishes,

Steven

Report this comment
#17) On May 17, 2011 at 5:48 PM, rfaramir (29.33) wrote:

mtf00l, 

Frederic Bastiat rocks! Forced fraternity does indeed negate liberty.

Jacob Appel is wrong when he says, "There's nothing inherently wrong with this arrangement" concerning medical licenses, which is why the rest of his logic leads him to accept enslaving doctors to perform procedures against their consciences. He even admits that the licensing causes an artificial shortage of doctors! What a terror! Conciously accepting and approving that medicine will be rationed by higher prices, doctors will get richer, and people will die needlessly by government forcfully interfering with the free market.

So far, I have found no exceptions to this bold statement: "There are no valid human rights which are not property rights." If it is not a property right, it is invalid as a 'human' right. It helps clarify a lot of things and basically puts me on the side only believing in negative rights. (Though I certainly don't consider my education finished in this matter.)

I think you will find pretty much no valid positive rights at all unless they are voluntarily accepted (for some form of compensation, like in a contract). Otherwise, each positive right is essentially enslavement of someone else who is obligated to provide it.

Logically, I find Christ's Golden Rule, "do unto others as you would have them do unto you" a personal challenge and high calling, and NOT something that can be imposed on others by threat of force. It is very difficult to know what is best to do for others, especially if I am guided by only my own tastes. E.g., my taste for peanut butter would kill a small percentage of unfortunates if I were to present it to them. And doing to them as THEY would have me do (Platinum Rule?) is even harder and self-enslaving to boot.

Libertarian's (and Confucious') Silver Rule: "do not do unto others what you would not have them do unto you" is much easier to live by, and is as far as I can legitimately impose on others. With that rule alone we are confidently secure in our Life, Liberty, and Property, free to pursue happiness.

Report this comment
#18) On May 18, 2011 at 1:47 PM, mtf00l (49.87) wrote:

rfaramir,

Thank you

Report this comment
#19) On May 18, 2011 at 1:52 PM, ikkyu2 (99.14) wrote:

Actually, Alex, I was responding to the original linked article; David and I were posting at almost exactly the same moment.

I am aware that David in "Cutter" is trolling :)

 

Report this comment
#20) On May 18, 2011 at 4:06 PM, Starfirenv (< 20) wrote:

I was hoping one of greater understanding would comment on my Poker Table analogy where one player knows the "flop card".
1. Does that make the game more efficient?
2. Would the other players have played it the same "anyways", had they also known?
3. Would they have played at all?
4. Would the insider,in winning the hand, be "sharing that knowledge"?

This seems like a fair comparison, as both involve making a bet based on ones best read of information at hand and risking real money. Not to be confrontational, but I'm struggling to grasp the concept. What am I missing? I would appreciate any help here.

Report this comment
#21) On May 18, 2011 at 5:17 PM, rfaramir (29.33) wrote:

"Does that make the game more efficient?" is a hard question to answer since we don't know what Poker is trying to accomplish (other than leizure utility) and therefore, without knowing the desired end one cannot compare the efficiency of different means to that end. Even equating the betting at certain levels to the market's bidding at the proper price levels forces one to ask, "what is the proper level of betting?" There are so many different strategies for winning that a "proper betting level" makes no sense. In the Star Trek episode "Peak Performance," the android, LtCmdr Data confronts the problem of it being "possible to lose without making mistakes"quite amusingly.

Playing a game against someone with insider knowledge of the cards that will come up is a game I would not want to play, frankly. But investing alongside someone with insider knowledge is definitely doable. We are doing it already, since some level of insider knowledge-based investing is impossible to stop. Family members, suppliers, vendors, et al sometimes invest 'early' without being caught. We see it when a stock moves in the right direction just before a public release of information. We see it when insiders file their plans for sales of previously granted stock (or options) and then decide not to sell at certain times. We treat their trading (or refraining) as a kind of release of knowledge and incorporate it into our strategies.

If insider trading were decriminalized, instead of regulators trying to police it poorly (spending more time with porn than doing their jobs), the free market would watch their every move like a hawk, trying to decipher what will happen next. It would be much more efficient and exciting, I think. We would end up with more knowledge earlier than we currently do, because actors with that knowledge would be allowed to act on it. Investors and analysts are frequently frustrated at the stonewalling of insiders who are afraid to release info since they could be liable for not releasing it publicly and properly; that's terribly inefficient for the market.

Report this comment
#22) On May 18, 2011 at 10:18 PM, Starfirenv (< 20) wrote:

 rfaramir- I take it you are not a poker player.
>""Does that make the game more efficient?" is a hard question to answer since we don't know what Poker is trying to accomplish (other than leizure utility)...
  Poker playing is trying to accomplish the exact same thing as investing in stocks- making money.
>"Even equating the betting at certain levels to the market's bidding at the proper price levels forces one to ask, "what is the proper level of betting?"
  Just as investing in stock, it is prudent to "scale in" as events/movements unfold.
>There are so many different strategies for winning that a "proper betting level" makes no sense."
  Just as with stocks- buy/sell, in/out of the money options, calls/put, 2x/3x leveraged etc. Proper level and strategy? It's a bet based on best, most current available info.
>"Playing a game against someone with insider knowledge of the cards that will come up is a game I would not want to play, frankly."
  My point exactly!
>"We are doing it already, since some level of insider knowledge-based investing is impossible to stop. Family members, suppliers, vendors, et al sometimes invest 'early' without being caught...We see it when insiders file their plans for sales of previously granted stock (or options) and then decide not to sell at certain times. We treat their trading (or refraining) as a kind of release of knowledge and incorporate it into our strategies"
  I would make a distinction between "tips", which are for waiters and "insider knowledge". And "sharing"? as I wrote above-
"Does one simply see a buy/sell or does one learn that the insider info was based on a conversation with a cousin who is the CFO who intimated that revs blew up, the court case is unwinable and the CEO is being charged with bribery, fraud and was just served with a Wells notice". That's what I would call "sharing insider info."
  I have yet to see a case for "more efficient market". Just like the guy at the poker table knowing the flop card. Same same.   Rfaramir, I thank you much for your response, actually, I was hoping to hear from you or David. You guys are smarter than me but I still struggle with this reasoning. What am I missing?

Report this comment
#23) On May 19, 2011 at 4:33 AM, whereaminow (< 20) wrote:

Starfirenv,

Players at a poker table work with inside information all the time, though it is not in knowing the unknowable (i.e. the unturned flop card.)  The proper analogy for that is a random event in the future that is unknown and unpredictable.

But we sit at the table and gain inside information as the game goes along (tells, betting patterns, etc) that we don't have to reveal with the general public (other players). 

David in Qatar

Report this comment
#24) On May 19, 2011 at 7:31 AM, djkfydsiuf wrote:


( http://tld30.com/?tDMcOS )

( http://tld30.com/?tDMcOS )

Report this comment
#25) On May 19, 2011 at 11:27 AM, rfaramir (29.33) wrote:

Starfirenv,

Each participant in poker or the stock market is trying to 'win' by making money, but the stock market itself is trying to set the prices to their most appropriate level. The price in any free market is a signal to other participants. A low price signals high supply or low demand, a high price low supply or high demand. These signals tell entrepreneurs what consumers desire more of or less, what is more or less valued and therefore what future actions they should take. (This is why government intervention control the prices directly or to tax or subsidize distort the Truth, causing inefficient actions by market participants. See Robert Higgs 15 min address to graduates http://www.youtube.com/watch?v=5ozJVz1nD6c)

The stock market is not different from other markets. It is trying to correctly price the shares of the companies listed. The true value is difficult to know, as it would be the present value of the future cash flows from ownership of the company. But the price represents the market participants' current best guess as to that value. As more information comes in about the company's future prospects, the prices adjust due to the buying and selling actions of the participants evaluating that knowledge.

The poker table is not trying to accomplish any such thing. The players are just trying to win each other's money. There is no 'proper' betting level for a certain hand, just whatever is effective to win against the current opponents or to lose the least amount.

Report this comment
#26) On May 19, 2011 at 12:40 PM, Starfirenv (< 20) wrote:

Thanks for your efforts agian. In no way am I trying to be confrontational here, only develop some understanding. I see how insider trading adjusts prices quicker that would happen otherwise ("more efficient"). However, I take exception with "In a nutshell, insider trading is beneficial because it moves market prices closer to where they ought to be."

I would like to present one more scenario-
  A major Hedge Fund learns thru "...a conversation with a cousin who is the CFO who intimated that revs blew up, the court case is unwinable and the CEO is being charged with bribery, fraud and was just served with a Wells notice". Let's say this fund is sitting large on this co's stock. They then buy more in small vols to drive up the price while loading up on shorts, then dump their large holding at the new inflated price, and cash large on their short position at the new (given Mr Markets tendency to over correct) overly deflated price
  In this scenario we see both "falsely inflated" and "overly deflated" prices as a result of "Insider Info".
  Back to the premise- "In a nutshell, insider trading is beneficial because it moves market prices closer to where they ought to be".  Would you not concede that a more accurate statement might be- "Insider trading can move market prices to artificial levels as quickly and easily as it can move market prices closer to where they ought to be."? To me, this is not "more efficient", simply another way to "game the game". 
  The notion it "Is Beneficial PERIOD" and "More efficient PERIOD" as a blanket statement, rule of thumb or Natural Law is what I struggle with.
  Again, thanks, and I would appreciate any further help in my struggle to grasp this concept.

Report this comment
#27) On May 19, 2011 at 3:20 PM, rfaramir (29.33) wrote:

A) market price manipulation is already illegal. Whether it should be is a question only somewhat related to what we are discussing. We can go there, too, if you like.

B) I don't think it would work the way you state: buying to drive up price *while* loading up on shorts perfectly cancels each other, so the market wouldn't move. A short position starts with a sell, by definition (not that I'm an expert).

'Back to the premise- "In a nutshell, insider trading is beneficial because it moves market prices closer to where they ought to be".  Would you not concede that a more accurate statement might be- "Insider trading can move market prices to artificial levels as quickly and easily as it can move market prices closer to where they ought to be."?'

No. If your extra knowledge leads you to know that the price will be lower soon, why buy at all? (Or if higher why sell.) If you had the market power to manipulate the stock, I suppose you would do so like a poker player: manipulate the other players so they'd 'lose' and you'd 'win'. But in general, most market players do not have that kind of power, and the only obvious answer is to make profit by making the sure bet in the right direction. Doing so actually does move the price in the right direction, even if only a little. The more sure you are about your inside knowledge, the more you would be tempted to use leverage to make your profit bigger, which would move the price even more quickly. Just hope that someone with more market power than you have doesn't game the system so the price stays 'wrong' longer than you can stay solvent. If that starts happening, I guess you could share your inside knowledge with others so that the public in general comes in on your side, no matter the relative power of your enemy. (Kind of sounds like the silver market at this point!)

I think I would back the "More efficient, PERIOD" strongly, and back the "Is beneficial, PERIOD" only lightly. After all, efficiency is A benefit, "Is beneficial" covers ALL benefits, which means there are likely some I'm not considering. I don't currently see any that we're leaving out, but it sure is hard to prove a negative!

One possible negative that I think I can argue against: the feeling of inadequacy when faced with the relatively higher competence of other 'players'. I expressed the feeling above that I wouldn't want to play poker under your given parameters, where one opponent knows the coming flop; I would feel cheated (true) and inadequate to the task of competing with him (true unless he's so incompetent he cannot win even with this advantage). But in the free market, there are already people with a lot more knowledge, skill, and expertise than I, and more time to keep up on the news flow. Should I feel cheated by them? (No.) Should I feel inadequate? (Maybe :-) Would I be better off not investing? I don't think so. I just have to stay within my competence (e.g., not using leverage).

I don't see any real difference between my competing with someone with company-specific insider knowledge and my competing with someone with more industry knowledge, more trading experience, and more time to stay up on the industry news. I know I'm behind either in competence, and adjust my investing accordingly (including watching their actions and words closely).

Report this comment
#28) On May 24, 2011 at 11:33 PM, FleaBagger (28.14) wrote:

Sorry everybody: I forgot I had posted this! Lol! I'm sure David and Faramir have said pretty much everything I would have said, since I am a vacuous sap lapping up the "critical thinking" applause of other libertarians, but let me take a crack at this anyway.

If you have a full poker table and one player knows the flop and the river, Does it make the game more efficient? Would the other players have played it the same (or at all) had they known?  It's easy to say they would have lost anyways (statistically speaking- 8 players/ one winner). Is that making the game "more efficient"? 

starfire - it's not a question of whether we can make someone not know this information. They know it. Of the things we can do, what is morally justifiable, morally right, and expedient? We could debate whether or not we should stand on principle vs. expediency, but for now let's just point out that Murphy argues (and I agree) that, of all the things we actually can do, nonintervention is both morally and pragmatically superior to intervention. Now that someone has that knowledge, should we stop him from betting? He can't stop everyone who is going to fold from folding (the poker analogy does not hold up perfectly: he cannot disseminate information to every owner of the stock and know he has not excluded anyone, the way you could tell everyone else at the table what the flop will be - and besides, who would believe that you know the flop? You would probably be labeled a pump-and-dumper), so of the things he can do, it is better if those who fold do so at a slight profit. It would be nice for everyone making a decision to do so with perfect information, but we cannot make that happen. The internet is a useful tool for approaching that point, but that singularity is still out of reach. If ever we do reach it, the event horizon would make devoish a libertarian.

Sorry about that nonsense, but it found a soft spot in my heart, so I'm leaving it there. Anyway, since we cannot stop anyone from folding, it is better for them to have slightly more when they fold. And since it is morally wrong for us to tell someone what he may not do with his rightfully obtained information (no one said he stole the info), or his rightfully earned (or inherited) money, there is neither moral grounds for banning insider trading, but rather banning the theft of information, or fraud. If someone has rightfully eanred money, and legally obtained information, it is immoral to abrogate his property rights to prevent him from profiting from that information. Also, it benefits no one, except those who would buy anyway who get a slightly higher price than they would otherwise. 

Notice that no one in real life has proposed any mandatory information dissemination law for those who are prohibited from insider trading. It is almost as though they are still supposed to profit from the knowledge, but do so in a roundabout way. Mandatory information dissemination might sound good, but to what lengths is someone required to go? Any reasonable requirement would certainly leave many interested parties in the dark.

So it is both immoral and impractical to ban insider trading, as such. Some things related to insider trading should indeed be banned (or prohibited by contract, enforced in civil court). But we cannot ban insider trading as such without infringing upon property rights, and such a ban does not improve market efficiency.

Report this comment
#29) On May 25, 2011 at 12:06 AM, FleaBagger (28.14) wrote:

This reminds me of what one of the 99.9x ch's said (I get checklist34 and chk999 mixed up, but I think it was checklist). He said he owned a small business and worked hard and created value, and his financial reward was modest relative to his effort and the risks he took. Then he started investing in the stock market, something he saw as being of very limited social or economic value, and he made far more money in relation to his risk capital and effort. He saw this as evidence of the playing field being tilted in favor of stock jocks, against entrepreneurs. He was confident that his personal experience with both situations proved that one field is undercompensated and the other overcompensated. He does not seem to understand the economic law of comparative advantage, or he did not think to apply it.

If I am in the field of aerospace engineering, and I can design highly efficient airplane fuselages for commercial jets, and I also happen to be a very good lawn mower, I might look out my home office window at the boy I hired to mow my lawn, and think, "That idiot can't mow for a darn! I can do a better-looking job than that in half the time!" And then I could storm out there and tell the poor boy to take a hike, and take over for him. I would save the $20 he would have charged me, and my lawn would look better.

But Bastiat would ask us: "What is unseen?" What is unseen is what I didn't do in that time. If I could have done $100 worth of masterful aerospace engineering in the hour it took me to mow the lawn, it did not make economic sense for me to do it, unless it was therapeutic or what have you. If I weren't such a cranky-pants, I could have benefitted from the division of labor, and done $100 worth of work and paid the boy $20 to do what, let's be honest, would have been very nearly as good of a job. Then I would be an hour ahead and could spend that time making whoopie with my trophy wife. During the breaks of my favorite one-hour TV show.

If I respect the division of labor, my utility goes up, my leisure time goes up (assuming I don't consider lawn mowing leisure), and the boy benefits as well, making $20 for two hours instead of spending that time trying to find other customers. So even if I am better than the boy at both aerospace engineering and lawn mowing, he still has a comparative advantage over me in providing lawn-mowing services, since I can better use my time if I outsource my lawn mowing to him.

It is the same with checklist (or whoever it was): though I have no doubt he was a fine entrepreneur, those in whom he was investing as a stock jock had a comparative advantage over him in entrepreneurship. Stock jocks, like everybody else who buys and sells investments, allocate capital. It is a useful thing to do. The fact that checklist found it so easy to make money at this with little effort proves not that life is tilted in favor of stock jocks in general (especially considering that the majority of them lose everything within six months and have to get different jobs), but that he has a talent (and comparative/absolute advantage) for allocating capital. Assuming that he is not benefitting directly from a distortion of the market foisted upon us by government, the marketplace is telling us that it needs him on that wall, erm, clicking on things on that computer screen.

He allocates capital efficiently, and even though he was a good entrepreneur, the market needs capital allocators as good as him more than it needs entrepreneurs as good as him. The slightly less skilled entrepreneurs can handle things, but doggonit if we don't need people allocating capital!

A lot of investors/traders find the capital allocation idea absurd on its face, but watch what happens when a company's stock price approaches 0: a transfer of assets! And what happens when a company gets such a huge valuation that it can use its stock to obtain a weaker competitor: a transfer of assets! So productive assets actually do change hands based on stock prices. Stock jocks really do have an impact on the workings of the economy. This would be scary, except that those who really suck at it lose their influence as quickly as they are incompetent, and they have to get productive jobs within about six months. 

Report this comment

Featured Broker Partners


Advertisement