Power & Market
New York Republican Congressman Chris Collins was indicted today on a variety of charges stemming from an investigation of insider trading. Prosecutors allege that he, along with son and soon to be son-in-law, is guilty of trading on non-public information concerning the results of a drug trial. Collins traded stock in Innate Immunotherapeutics Limited, a company where Collins is a board member, in order to avoid over $768,000 in losses.
While there is undoubtedly numerous actions Collins has taken as a Congressman that warrants him being criticized by society, insider trading is not one of them. This news story is a good opportunity to revisit an article by Bob Murphy on the subject, explaining how insider trading actually has social value and why laws cracking down on the practice open the door to the heavy hand of government going after all sorts of profitable activity.
Excerpted from Is Insider Trading Really a Crime?
We Want People Trading on Unique Knowledge
To understand the social benefits of insider trading, we have to first realize that stock prices mean something. They reflect real facts about the world, such as the assets and liabilities of a particular corporation and how effectively its current management is using resources to satisfy customers.
If a computer glitch suddenly swapped the prices randomly on all corporate stocks, the result would be disastrous, and it would affect "Main Street" as much as Wall Street. For an exaggerated example, if the share price of Microsoft fell from its current level of around $25 down to $1, a "corporate raider" might find it very profitable to borrow money, buy a controlling share in the company, and sell off all company assets to the highest bidders. The high price of $25 per share fends off such efforts to break up the successful company. The assets currently owned by the Microsoft Corporation are best deployed by Microsoft, rather than being integrated into different organizations around the world.
In general, speculators perform a useful social service when they are profitable. By buying low and selling high (or by short-selling high and covering low), stock speculators actually speed up price adjustments and make stock prices less volatile than they otherwise would be.
In this context, we can see the absurdity of the general view of "insider trading." There is a whole literature on the economic analysis of the subject, and economist Alex Padilla's 2003 dissertation defended the practice from a specifically Austrian angle. In a nutshell, insider trading is beneficial because it moves market prices closer to where they ought to be. Those profiting from "inside knowledge" actually share that knowledge with the rest of the world through their buying and selling.
Insider Trading: Who Is the Victim?
Above, we acknowledged the fact that obtaining information in illegal ways obviously had actual victims. But the mystique behind "insider trading" suggests that somehow if a person financially profits from special knowledge, that he or she is bilking the general public.
In general, this analysis doesn't hold up, as Murray Rothbard has pointed out. For example, suppose a Wall Street trader is at the bar and overhears an executive on his cell phone discussing some good news for the Acme Corporation. The trader then rushes to buy 1,000 shares of the stock, which is currently selling for $10. When the news becomes public, the stock jumps to $15, and the trader closes out his position for a handsome gain of $5,000. Who is the supposed victim in all of this? From whom was this $5,000 profit taken?
The $5,000 wasn'ttaken from the people who sold the shares to the trader. They were trying to sell anyway, and would have sold it to somebody else had the trader not entered the market. In fact, by snatching the 1,000 shares at the current price of $10, the trader's demand may have held the price higher than it otherwise would have been. In other words, had the trader not entered the market, the people trying to sell 1,000 shares may have had to settle for, say, $9.75 per share rather than the $10.00 they actually received. So we see that the people dumping their stock either were not hurt or actually benefited from the action of the trader.
In fact, the only people who demonstrably lost out were those who were trying to buy shares of the stock just when the trader did so, before the news became public. By entering the market and acquiring 1,000 shares (temporarily), the trader either reduced the number of Acme shares other potential buyers acquired, or he forced them to pay a higher price than they otherwise would have. When the news then hit and the share prices jumped, this meant that this select group (who also acquired new shares of Acme in the short interval in question) made less total profit than they otherwise would have.
Once we cast things in this light, it's not so obvious that our trader has committed a horrible deed. He didn't bilk "the public"; he merely used his superior knowledge to wrest some of the potential gains that otherwise would have accrued as dumb luck to a small group of other investors.
To repeat, stock-market speculation is not a zero-sum activity. Even though we can look at any particular transaction and tally up the "winners" and "losers," the presence of speculators enhances the overall functioning of the stock market. For example, the market for any particular security is more liquid when there are rich speculators who will quickly pounce on a perceived mistake in pricing. If an institutional investor (such as a firm managing pensions) suddenly has a cash crunch and needs to dump its holdings, speculators will swoop in and put a floor under the fire-sale price. This is good for the beleaguered pension fund, and for the stock market in general.
Laws against Insider Trading Give the Government Arbitrary Power
Crackdowns on insider trading are harmful because they chill the cultivation of superior knowledge and speculative correction of market prices. Beyond this loss of general economic efficiency, insider-trading laws are insidious because of the arbitrary power they give to government officials.
In the specific case of Rajaratnam, prosecutors for the first time relied extensively on wiretaps to prove their allegations of insider trading. Legal experts predict that the government will expand its eavesdropping on the financial community in light of this courtroom "success."
More generally, Murray Rothbard argued that every firm on Wall Street is technically engaging in "insider trading." If they literally relied only on information that was available to the public, how could they make any money? Thus, the government has the statutory authority to harass or even shut down anybody in the financial sector who doesn't play ball. In Making Economic Sense, Rothbard declared,
There is another critical aspect to the current Reign of Terror over Wall Street. Freedom of speech, and the right of privacy, particularly cherished possessions of man, have disappeared. Wall Streeters are literally afraid to talk to one another, because muttering over a martini that "Hey, Jim, it looks like XYZ will merge," or even, "Arbus is coming out soon with a hot new product," might well mean indictment, heavy fines, and jail terms. And where are the intrepid guardians of the First Amendment in all this?
But of course, it is literally impossible to stamp out insider trading, or Wall Streeters talking to another, just as even the Soviet Union, with all its awesome powers of enforcement, has been unable to stamp out dissent or "black (free) market" currency trading. But what the outlawry of insider trading (or of "currency smuggling," the latest investment banker offense to be indicted) does is to give the federal government a hunting license to go after any person or firm who may be out of power in the financial-political struggles among our power elites. (Just as outlawing food would give a hunting license to get after people out of power who are caught eating.) It is surely no accident that the indictments have been centered in groups of investment bankers who are now out of power.
To drive home just how arbitrary and non-criminal "insider trading" really is, consider this scenario: 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?
Gun control may be coming to a legislature near you.
In the wake of the Parkland, Florida, and Santa Fe, Texas, shootings, elected officials on both sides of the political aisle are rallying around “red flag” legislation.
Extreme Risk Protection Orders (ERPOs), informally known as red flag laws, are gaining traction in legislatures nationwide. Red flag laws are presented as a common-sense proposal to disarm people who allegedly present a danger to themselves or others around them.
Political leaders assure gun owners red flag laws won’t trample over civil liberties and are a middle ground solution that appease pro-gunners and gun controllers alike. But the devil is in the details when dealing with any form of government intervention.
The Potential Threat of Red Flag Laws
In Gunpowder Magazine, Ted Patterson details the potential dangers of “red flag” laws. Four points stick out the most:
Anti-gun family members, friends, or acquaintances can levy dubious accusations to justify the confiscation of law-abiding gun owners’ guns. They can take these accusations to a court of law, even if the individual in question was not charged or convicted of a crime. In turn, due process rights are turned upside down, as gun owners are presumed to be guilty and must then prove their innocence.
The duration of ERPOs is unclear — which could end up being weeks, months, or even a year. Gun owners would then be forced to go to court multiple times just to win their Constitutional rights back.
What makes red flag laws even more dangerous is the bipartisan support they currently boast. It is no secret when both parties come together on legislative matters, nothing good can come out of it.
Political insiders constantly remind us that Republicans are staunch supporters of the Second Amendment. They contend Republicans play a pivotal role in defending our gun rights, and any criticism directed toward them is unjustified.
But nothing could be further from the truth. A Republican governor in Maryland recently signed a red flag bill into law, while Republicans in states like Colorado and Pennsylvania have actively pushed red flag bills of their own.
Lawmakers under the impression that compromising on red flag laws will curtail further gun control attempts, are in for a rude awakening. The nature of the government beast is to expand.
Economist Ludwig von Mises recognized full well how interventionism is “illogical and unsuitable, as it can never attain what its champions and authors hope to attain.” Once the regulations fail, the political class will clamor for even more regulations to “fix” the problems they ironically created in the first place.
This has been on display in sectors such as healthcare. Under the banner of “compassionate conservatism,” George W. Bush signed Medicare, Part D into law — the largest welfare expansion since Medicare was originally established in 1965.
Even with the passage of Medicare, Part D, healthcare interventionists were still not satisfied. Once Democrats returned to power with significant majorities in both chambers of Congress, then President Barack Obama passed a hefty piece of government intervention in Obamacare with ease.
We can expect the same dynamic to occur if politicians start kowtowing to red flag laws. The recent passage of Fix NICS is already a troubling development.
At this point in the game, it may behoove gun rights activists to start shifting their focus toward decentralization and fight for expanding gun rights in their own backyards instead of looking for Washington to change its ways.
Neocons are a group that virtually no one likes. Indeed, I've never met a single person who identified as one. In fact, I've never met a single person who knew what neocon was and didn't outright hate them. Part of that is probably because they are a bunch of warmongers who are always wrong about everything. But they do, unfortunately, have a wildly disproportionate amount of influence in Washington.
As far as being wrong about everything goes, Bill Kristol is the all-time champion. Here's a very short list . But they include; Obama didn't stand a chance in the 2008 election, echoing that the insurgency was in its last throes, that Iraq wasn't in a civil war, that Trump would pick Christie as his running mate and on and on and on. But this one from before the Iraq war started is truly legendary:
Unfortunately, the Twitter handle "Kristol in History" is now inactive. But if you're looking for a good chuckle, it's worth reading through a few:
In a constantly changing media landscape, the value of the shock political poll continues to stand the test of time. Whether it comes in the form of man-on-street interviews, or the slightly more scientific polling firm, seeing a surprising number of Americans give their support to an outlandish position is an evergreen idea to spawn clickable blog posts and perhaps even a spot on Drudge Report. Going beyond the obvious question of why, given the state of American politics, anyone continues to find humorous outcomes from these quasi-ballots is that sometimes they actually reveal a valuable insight about the public as a whole.
My personal favorite example was the 2015 PPP poll that found that 30% of the Republican base – including 41% of Trump supporters – endorsed bombing Agrabah, the country featured in Aladdin. Considering that online trolls were a natural core group of the Trump base, it’s fair to question the sincerity of the widely mocked poll’s findings. It does, however, correlate to another trend we see in public polling on military action. The Washington Post, for example, has found that Americans are more likely to support bombing a country if they couldn’t identify it on the map:
Does it really matter whether Americans can put Ukraine on a map? Previous research would suggest yes: Information, or the absence thereof, can influence Americans’ attitudes about the kind of policies they want their government to carry out and the ability of elites to shape that agenda….
The further our respondents thought that Ukraine was from its actual location, the more they wanted the U.S. to intervene militarily.
Given that, it’s not unreasonable to think that many Republicans really don’t mind attacking some random country with a vaguely Arab name. This would explain how some politicians still manage to find public favor, in spite of always being on the wrong side of history on matters of war.
Another valid insight couched in a poll shared for humor was an IPSOS poll that found Republicans have a more favorable view North Korean dictator Kim Jong Un than Nancy Pelosi Pelosi’s office naturally used the story to attack Trump supporters, with her spokesman telling The Hill:
On a daily basis, President Trump praises this dictator and thug so it only makes sense that his party is following his lead like lemmings over a cliff.
To be fair, the poll only compared generic favorability/unfavorability measurements to various other figures polled, with Pelosi only being seen a slightly less favorable to Kim. That being said, it would be reasonable for more Republicans – or Americans broadly – to find Pelosi a greater threat to their livelihood to than Trump’s latest bromance.
After all, for all the warnings about North Korea and its nuclear arsenal, the danger of it being wielded against American citizens is about as valid as fears about Saddam Hussein. Meanwhile Pelosi, and the rest of Washington for that matter, poses a very real threat to the life, liberty, and property of Americans on every day. While earnest human rights activists would undoubtedly point to the repulsive horrors of the Kim regime, Pelosi’s support for the Iraq War and other American escapades makes it difficult to defend her on even broad utilitarian grounds.
So yes, any American would be justified in hating Nancy Pelosi or just about any other politician in Washington. At least Kim has agreed to shake the hand of peace, something Congress is entirely unwilling to even consider.
Today was the first day of this year’s Rothbard Graduate Seminar. A total of 27 students from 13 countries have joined us in Auburn to dissect and discuss Murray Rothbard’s economic treatise Man, Economy, and State. RGS stands alone as the sole academic program in the world that applies the tradition of a great book seminar to Austrian economics. It has proved to be an invaluable asset in developing modern scholars in the Misesian tradition, and is possible thanks to the incredible generosity of Alice Lillie.
Man, Economy, and State is a work deserving of the title "great book, it having played an important role in the history of Austrian economics. Dr. Joseph Salerno has credited the publishing of Rothbard’s masterpiece as being vital to the revival of the Austrian tradition in the United States. As he wrote in his paper, The Rebirth of Austrian Economics — in Light of Austrian Economics:
This handful of scattered contributions to Austrian economics forthcoming in the 1950s, however, would have defined the death throes of the school rather than the prelude to its rebirth were it not for the creative genius of Murray Rothbard, which came to fruition in the early 1960s. The revival of Austrian economics as a living scientific movement can be dated from the publication of Rothbard’s Man, Economy, and State in 1962, a contribution to Austrian economics and to pure economics in general that ranks as one of the most brilliant performances in the history of economic thought.
In his review of the book in 1962, Ludwig von Mises also identified Man, Economy, and State as an important contribution to economics that built upon the contributions of the Austrian school:
The main virtue of this book is that it is a comprehensive and methodical analysis of all activities commonly called economic. It looks upon these activities as human action, i.e., as conscious striving after chosen ends by resorting to appropriate means. This cognition exposes the fateful efforts of the mathematical treatment of economic problems…
In every chapter of his treatise, Dr. Rothbard, adopting the best of the teachings of his predecessors, and adding to them highly important observations, not only develops the correct theory but is no less anxious to refute all objections ever raised against these doctrines. He exposes the fallacies and contradictions of the popular interpretation of economic affairs.
Today’s RGS sessions focused on the first three chapters of Man, Economy, and State, with Dr. David Gordon lecturing on praxeology and Dr. Guido Hulsmann leading discussion on topics such as direct and indirect exchange.
Some photos from today’s sessions can be found below:
Economics professor Bernard Malamud made the local paper today as he is retiring after teaching at UNLV for 50 years. I had Professor Malamud for a class, but darn if I can remember what the class was.
Malamad showed up in 1968 when UNLV was but a dream. “The campus was a desert; there was nothing here,” he told the R-J “There were rabbits running around and coyotes running around, and what Tom [White] described was a big-city university. That’s what we’ve become.”
The article mentions several predictions he flubbed. He had projected the Las Vegas population to top out at 750,000 or a million. The real estate boom and subsequent 2008 crash, “As far as the spurt in property values here, I thought, hey, we’re just catching up to where we ought to be catching up, to big cities like Phoenix and even Los Angeles,” he said. “The bust and the severity of the bust did surprise me.”
What surprised me is he has been teaching History of Economic Thought. He told the paper, that it’s his favorite class. “It’s covering the whole spectrum of economics,” he said. “I get to reminisce about each of the themes of the economics discipline.” I would guess he would leave out the Austrian school despite having officed down the hall from the modern dean of the Austrian school, Murray Rothbard, along with the current dean of the school, Hans Hoppe.
Until January of 1995, Murray Rothbard taught the History of Thought class. I’ve written before about the experience. I had no idea who Rothbard was and a fellow student told me to avoid Murray, calling him a kook. Professor Malamud, an avid Keynesian, likely didn’t recommend Rothbard either.
The first night of class, Murray hit the door and started talking immediately, something about dumb politicians threatening the evil oil companies that were raising gas prices. From that thought, he just continued right into his History of Economic Thought lecture. He didn’t take roll, or hand out a syllabus. Murray didn’t have time for that; he had centuries of history to cover.
So the 8 or 10 of us in the class furiously took notes trying to keep up. I didn’t know it at the time, but only half of us were taking the class for credit, the other half were just auditing the course, having taken it previously for credit. Murray changed his History of Thought lectures each semester, so students took it as often as it was offered. In the fall of 1990, the course had a financial history emphasis.
Professor Malamud is a nice guy. He attended my thesis defense, but, as I remember, had to leave beofre I finished to teach a class. It’s unlikely he will be honored at an event such as the Mises Institute’’s 35th anniversary which was completely dedicated to Rothbard and where a group off Murray’s former students had a panel reminiscing about him and the effect he had on our lives (unfortunately the audio/video has not been posted by the Institute as of this writing).
Imagine how different the History of Thought class was with Rothbard (his 2 volume “An Austrian Perspective on the History of Economic Thought” was essentially his lectures) as opposed to Malamud’s version.
Natalie Bruzda writes some of the names Malamud was lecturing about when she visited.
Sir William Petty, an English economist who died in 1687, was on one end of the spectrum. John B. Taylor, an economist and professor at Stanford University, was on the other end. His favorite economist, John Maynard Keynes, also appeared on the whiteboard.
Murray never got to Keynes, who he referred to in class as “Maynard” followed by his signature cackle. My guess is Dr. Malamud didn’t spend any time on the Scholastics or the School of Salamanca.
In New York, our panel of Murray’s students remembered Murray’s lecture style. As I told the LMR report, “If students took everything down, lecture notes might start with Aristotle, then veer off to Hillary Clinton, then maybe to the New York City Mayoral race and back to Aristotle.”
I hope Dr, Malamud has a long and healthy retirement. He is 76. No doubt, another Keynesian has been hired to replace him.
Murray left us far too early, but his work lives on, as do our memories.
I've been really enjoying David Beckworth's Macro Musings podcast - a nice, conveniently way of hearing some good econ discussions outside of my own personal bubble.
There was an interesting interview with Neel Kashkari who talks about why there has been very little movement within the Fed to really explore NGDP Targeting or pushing up the inflation target, in spite of the large amount of chatter about those topics among academics. He explains that it's because when Fed officials actually talk to real people in communities, in particularly community bankers, any discussion of playing around with inflation is instantly rejected - in part because the public as a whole has so much inherent skepticism and mistrust of the Fed as it stands now. (I'll also note that while I obviously don't like Kashkari's views on monetary policy, his candor and transparency in his Fed role has been great.)
I think this plays back to the success of Ron Paul's libertarian populist campaign, and a good push back to the argument that he never accomplished anything while in office. While it's certainly true that there aren't many legislative achievements to his CV, he effectively used his platform to push the Fed and money into public discourse and effectively won the argument. The impact isn't limited to simply the "public" either. Fed skepticism has become status quo GOP orthodox - to the point where some Republicans on the Hill have been frustrated with Trump's status quo Fed picks. We've also seen legislation advanced by House Republicans to reform the Fed (even though I don't think that highly of them) and Dr. Paul's Audit the Fed Bill has received the support of the majority Republican legislators when it has come up to vote.
In fact, when you consider that Bitcoin was built on explicitly Austrian origins, it's possible that Ron Paul's impact didn't only help restrain the Fed, but actually inspired very real solutions to government-controlled fiat currency. The grassroots movements to legalize gold and silver at state levels obviously plays into this as well. All in all, by effectively using a populist appeal to engage and educate the public - rather than focus on trying to impose top-down reforms through legislation - Dr. Paul was able to have as large an impact on American monetary policy as perhaps any single legislator since the creation of the Fed.