16 May 2011

Is Insider Trading Really a Crime?

Economics, Financial Economics, Shameless Self-Promotion 86 Comments

My sources say no:

[S]uppose 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’t taken 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.

The people who held the stock beforehand, and retained it throughout the trader’s speculative activities, were not directly affected either. Once the news became public, the stock went to its new level. Their wealth wasn’t influenced by the inside 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.

86 Responses to “Is Insider Trading Really a Crime?”

  1. RG says:

    Only a matter of time before someone is indicted for insider refraining from trade.

  2. Blackadder says:

    Insider trading *is* a crime. The question is whether or not it should be. On that score I am inclined to agree with you (and Matt Yglesias).

    • Major_Freedom says:

      Depends on which “governing authority” you’re implicitly assuming is the authority when you say “crime.”

      Insider trading is not necessarily a crime, if you don’t make any assumptions regarding governing authority.

      I can legitimately argue that the government commits crimes, even when they enforce their own laws correctly. I can say this if I am assuming the “governing authority” to be what philosophers call “natural law.”

      I can say that government A is committing a crime, even if they enforce the law they consider to be legal, if such an enforcement violates, i.e. “breaks,” the rules inherent in natural law.

      For example, natural law outlaws slavery. Even if the government enforces slavery as legal, then it would still be true that slavery is a crime. It would be a crime because it violates the governing authority of natural law.

      • Blackadder says:

        For example, natural law outlaws slavery.

        You need to read your Walter Block. Slavery is just another application of property rights.

        • Major_Freedom says:

          You need to read your Rothbard. Slavery means involuntary labor. Voluntary slavery is an oxymoron.

          Block contradicts the meaning of slavery when he proposes the scenario of a person who voluntarily sells himself into “voluntary slavery” to earn enough money to cure his dying child.

          • Blackadder says:

            You need to read your Rothbard.

            I have. Rothbard’s condemnation of slavery is inconsistent with his stated principles.

            Slavery means involuntary labor.

            No, slavery means ownership of a person. If you believe that human beings own themselves then you ought to believe that they can sell themselves.

            • Major_Freedom says:

              I have. Rothbard’s condemnation of slavery is inconsistent with his stated principles.

              How so?

              And how would his argument against slavery allegedly being inconsistent with his other principles, imply that his argument against slavery is wrong?

              No, slavery means ownership of a person.

              No, slavery is involuntary labor. It is treating other people as if they are property. But that doesn’t mean they are property.

              If you believe that human beings own themselves then you ought to believe that they can sell themselves.

              Sure, they can sell their bodies, but that’s not slavery. Prostitutes sell their bodies, but they’re not slaves. But those who are coerced by violence into performing sex acts are called “sex slaves” because their sexual “labor” is involuntary.

              Again, you’re just arguing over the definition of slavery. I hold slavery to mean involuntary labor.

              You can define slavery differently, but then you would not be arguing against my initial argument that slavery is against natural law.

            • Major_Freedom says:

              When Rothbard condemns slavery, he isn’t just referring to involuntary servitude. For example, he says in the Ethics of Liberty that “a man can alienate his labor service, but he cannot sell the capitalized future value of that service. In short, he cannot, in nature, sell himself into slavery and have this sale enforced—for this would mean that his future will over his own person was being surrendered in advance. In short, a man can naturally expend his labor currently for someone else’s benefit, but he cannot transfer himself, even if he wished, into another man’s permanent capital good. For he cannot rid himself of his own will, which may change in future years and repudiate the current arrangement.”

              So it’s not simply the case that Rothbard and Block agree on the substance but disagree on the meaning of the word “slave.”

              What are you talking about? That exactly shows Rothbard and Block disagree on the meaning of slavery. Rothbard here is just showing why he does not define slavery as including the voluntary form of it as does Block. Rothbard doesn’t define slavery as including voluntary forms of it because Rothbard held that the individual always retains his own will by the very nature of being a human. One cannot therefore sell their will to someone else.

              The fact that Rothbard’s argument is inconsistent with his other principles doesn’t mean the argument is wrong.

              It hasn’t even been shown that Rothbard’s views on slavery was inconsistent with his other principles such that you can say “the fact that”.

              But it does mean that if someone does accept his other principles (as I assume you do), then they ought to reject his argument.

              Assume anything you want, but it’s not even necessary that I ought to reject Rothbard’s argument against slavery if I agree with his other principles. I will only do so if it can actually be shown that his principles are inconsistent. Neither Block nor you have done this, at least not yet.

              • Blackadder says:

                Major Freedom,

                Suppose that you and I sign a contract where if My team wins the Superbowl you become my slave but if your team wins I become your slave. Your team wins, and I say “I know I agreed to be your slave if my team lost, but I’ve changed my mind; I don’t want to anymore.”

                Block would say: “too bad, you agreed to be this MF’s slave, so that’s what you have to do.”

                Rothbard would say:”wills are free and can’t be sold, so even if you voluntarily agreed to the terms of the contract you aren’t bound by it, morally or legally, if you change your mind.”

                Rothbard and Block wouldn’t be disagreeing about whether what the contract specified was slavery. They both would agree that it did. Rather, there disagreement is over the substantive issue of whether the contract can be (morally) enforced or not.

              • Major_Freedom says:

                Suppose that you and I sign a contract where if My team wins the Superbowl you become my slave but if your team wins I become your slave.

                Your team wins, and I say “I know I agreed to be your slave if my team lost, but I’ve changed my mind; I don’t want to anymore.”

                Block would say: “too bad, you agreed to be this MF’s slave, so that’s what you have to do.”

                Rothbard would say:”wills are free and can’t be sold, so even if you voluntarily agreed to the terms of the contract you aren’t bound by it, morally or legally, if you change your mind.”

                Rothbard and Block wouldn’t be disagreeing about whether what the contract specified was slavery. They both would agree that it did. Rather, there disagreement is over the substantive issue of whether the contract can be (morally) enforced or not.

                In your example here you are not only including an argument of whether or not this contract is morally enforceable, that Rothbard and Block would disagree. There is also the implicit assumption of what Rothbard and Block would consider to be slavery at all. You just claimed that Rothbard would agree with Block that such a voluntary contract is just another form of slavery. But Rothbard would not consider that contract to be one of slavery, because it is voluntary.

                Rothbard would consider it to be a non-binding, voluntary provision of one’s labor up to the moment in time when the provider of labor, through his will, ceases to agree to provide his labor. Yes, at this point, Rothbard would say that any contract of labor would become null and void, whereas Block would argue that it remains enforceable. On this point, they disagree. But they ALSO disagree on whether or not this contract even is slavery.

                By the same token, if one of the parties uses violence to enforce the (null and void according to Rothbard) contract, then at this point, Rothbard would be saying that THIS is when slavery arises between the two parties.

                So they do disagree on the meaning of slavery. It’s not only a disagreement on the morality of enforcement.

                Our super bowl contract just contains the word slavery. It would not be considered a slavery contract to Rothbard. It would be considered a slavery contract to Block though.

                Block would argue that such a contract is morally enforceable, whereas Rothbard would not.

              • Blackadder says:

                Rothbard would not consider that contract to be one of slavery, because it is voluntary.

                Rothbard would consider it to be a non-binding, voluntary provision of one’s labor up to the moment in time when the provider of labor, through his will, ceases to agree to provide his labor.

                The phrase that Rothbard uses to describe such an arrangement is “sell [yourself] into slavery,” so insisting that Rothbard wouldn’t consider this arrangement slavery when he explicitly does so is kind of weird (unless you have sold your right to publicly admit that Rothbard was ever wrong about anything, in which case I understand).

              • Major_Freedom says:

                The phrase that Rothbard uses to describe such an arrangement is “sell [yourself] into slavery,”

                You quoted him out of context. Rothbard only used that phrase temporarily, as a consideration of the idea of selling oneself into slavery, which is what he was critiquing.

                The full quote is:

                “The distinction between a man’s alienable labor service and his
                inalienable will may be further explained: a man can alienate his labor service, but he cannot sell the capitalized future value of that service. In short, he cannot, in nature, sell himself into slavery and have this sale enforced.”

                Rothbard is saying that the very proposition “selling oneself into slavery” is an impossibility.

                And later on…

                “The concept of “voluntary slavery”
                is indeed a contradictory one, for so long as a laborer remains totally subservient to his master’s will voluntarily, he is not yet a slave since his submission is voluntary; whereas, if he later changed his mind and the master enforced his slavery by violence, the slavery would not then be voluntary.”

                While Block would consider the proposition “selling oneself into slavery” as meaningful and valid in itself, Rothbard would reject the entire proposition as nonsensical, because he didn’t hold that one could sell oneself into slavery. This is because, as I have repeatedly pointed out, but for some reason you are having trouble understanding, Rothbard defined slavery differently than Block.

              • Blackadder says:

                Rothbard is saying that the very proposition “selling oneself into slavery” is an impossibility.

                No, he’s saying it’s illegitimate.

                In the quote you give, Rothbard equates selling oneself into slavery with selling the the capitalized future value of one’s labor services. It is conceptually possible to sell the former, hence it is conceptually possible to sell yourself into slavery.

                Rothbard does make an argument against the moral legitimacy of this sort of arrangement, but his argument is not consistent with his other principles. If two people voluntarily enter into an agreement with each other, then that agreement is voluntary. It doesn’t cease to be voluntary simple because one of the parties later changes his mind. If it did, then you would pretty much have to do away with contract altogether.

              • Gene Callahan says:

                “Rothbard is saying that the very proposition “selling oneself into slavery” is an impossibility.”

                And since millions of people have done just what he says is impossible, that was a very silly thing to say!

              • Major_Freedom says:

                No, he’s saying it’s illegitimate.

                He’s saying it’s an impossibility AND it’s illegitimate.

                In the quote you give, Rothbard equates selling oneself into slavery with selling the the capitalized future value of one’s labor services.

                Which he considers impossible, and any contract based on it illegitimate.

                It is conceptually possible to sell the former, hence it is conceptually possible to sell yourself into slavery.

                Not according to Rothbard it isn’t. According to Rothbard, it is impossible to sell your future will, before you will.

                Rothbard does make an argument against the moral legitimacy of this sort of arrangement, but his argument is not consistent with his other principles.

                What other principles are you talking about that are not consistent with his argument concerning slavery?

                If two people voluntarily enter into an agreement with each other, then that agreement is voluntary. It doesn’t cease to be voluntary simple because one of the parties later changes his mind. If it did, then you would pretty much have to do away with contract altogether.

                This is a common misconception concerning Rothbard’s argument on the impossibility, and illegitimacy, of voluntary slave contracts.

                First off, to reject a contract whereby one individual allegedly sells his future will to someone else, does not mean the entire notion of voluntary contracting goes out the window. The reason for this is that the rejection of the voluntary slave contract is founded upon a distinction between alienable and inalienable goods and services. It is precisely because your will is not alienable that it is separate from all things that are alienable.

                To reject inalienable contracts does not mean we have to reject alienable contracts. We can support, and enforce, alienable contracts. Yes, such enforcement can be in response to a party “changing his mind” which, when considered in isolation, definitely resembles a party in a voluntary slave contract “changing his mind.” This can then be taken to mean that if we can allow parties to “renege” on voluntary slave contracts, then why not renege on all voluntary contracts whatever?

                I think it would help to explain more on why a person voluntarily selling their future will to someone else to be not only impossible, but illegitimate and not enforceable:

                An individual cannot will himself in any time but the present. A person who contracted with another person today an agreement that only concerns the past in all the details, would be an impossible contract, even if the individuals tried to contract for it. Imagine you and I contracted whereby we agree that if the Bears win the Superbowl 10 years ago, then you pay me $500 10 years ago, and if the Steelers win the Superbowl ten years ago, then I pay you $500 10 years ago.

                This contract, by all superficial treatments, is “voluntary.” After all, you and I are clearly willing to agree to this contract. But does this contract even make any sense? Is it even a contract? Is it enforceable?

                This way of thinking is how you can approach contracts that concern future will. Future will is the same in principle as past will. Neither exist in the present, when contracts are signed. Contracts are only ever signed in the present, and the only reason they are valid is if they concern present will, or present will and alienable future goods and services. You cannot contract for your future will any more than you can your past will.

                Now, at this point, you may object and say that people do contract for their future will, for example, they sign contracts whereby they promise to provide their labor in the future. That seems to be a contracting for one’s future will, because one has to will himself to provide labor. But that is not what the individual is actually contracting for. He actually only contracted a promise. He is trading his credit and good will to the buyer. He is not trading his future will.

                If the person who promised to provide his labor reneges, then if the contract states that the counter-party can use “force” to compel him to work, then that would not even be “force” properly understood, because the initial party agreed to be physically treated in the way the contract stipulated. It would be voluntary masochism, not voluntary slavery. Of course to an outsider, it may look exactly like slavery, just like to an outsider an act of consensual sex can look like rape.

                If the person changes his mind about the permitted recourse in the contractual agreement, and did not want to receive such a treatment in response to breaking the contract he agreed to, then the other party is justified in treating the first person the way he voluntarily agreed to be treated in the past when he signed the contract. This would not be slavery, because the individual agreed to it. Block would call this a voluntary slave contract. Rothbard would call this a voluntary labor contract with voluntary masochism.

                To Rothbard, slavery arises when a person is subjected to physical force to provide labor that he never agreed to provide on his own will.

                To say that there is involuntary slavery and voluntary slavery, is to totally abolish the entire meaning of slavery. Slavery is based on a distinction between voluntarism and involuntarism. It would be like saying voluntary rape, or voluntary murder. Rape and murder are used to describe involuntary acts, not voluntary acts. If they were voluntary, then they would be called sex and suicide respectively.

        • Silas Barta says:

          Yes, natural law (per Block) permits you to sell yourself into slavery. It does not permit you to enslave someone who hasn’t granted you this right.

          Way to read, Addy.

          • Blackadder says:

            Yes, natural law (per Block) permits you to sell yourself into slavery. It does not permit you to enslave someone who hasn’t granted you this right.

            So you agree with me and disagree with Major Freedom?

            • Major_Freedom says:

              We’re all debating the meaning of slavery.

              Block and you think that slavery includes voluntarily selling your body to someone else.

              Rothbard and I think that slavery does not include voluntarily selling your body to someone else.

              • Gene Callahan says:

                “We’re all debating the meaning of slavery.”

                Yes, due to the fact that Blackadder, Block AND Rothbard (Yes, he does think voluntarily selling yourself into slavery is slavery!) are all using the actual definition (which I copied out of a dictionary and pasted into another comment), and you are using one of your own, the debate has turned into one of definition.

              • Major_Freedom says:

                Yes, he does think voluntarily selling yourself into slavery is slavery!

                No, he doesn’t. He rejects the entire concept of voluntary slavery as nonsensical.

                and you are using one of your own

                Well, I made it clear what meaning I used for the term when I originally said that slavery is against natural law.

                Blackadder said that Block thinks slavery is not against natural law. But Block, and Blackadder, are using a different definition of slavery than Rothbard, and myself.

                Rothbard rejects voluntary slavery as a valid concept. Block does not.

                I consider voluntary slavery to be an oxymoron, so my original argument about slavery being against natural law stands.

                What you’re doing…I have no idea. Well, I can guess. My guess is that you just want to be contrarian against me for the sake of being contrarian. I could be wrong.

              • Gene Callahan says:

                “In medieval Russia, self-sale was the main source of slaves.” — Wikipedia
                Just trying to stick with the facts, and with everyday usage of words, that’s all.

              • Gene Callahan says:

                “No, he doesn’t. He rejects the entire concept of voluntary slavery as nonsensical.”

                Well, I researched this and I stand corrected. I did not believe Rothbard would have said something that silly, but he did!

              • Major_Freedom says:

                Well, I researched this and I stand corrected. I did not believe Rothbard would have said something that silly, but he did!

                How is it “silly”?

              • Major_Freedom says:

                “In medieval Russia, self-sale was the main source of slaves.” — Wikipedia

                Just trying to stick with the facts, and with everyday usage of words, that’s all.

                This does not constitute rational argumentation. Citing definitions used by others to refute another person’s argument that depends on a different definition is silly.

                Rothbard would have said that those who “sold themselves” did not actually sell themselves, but only their labor. Their will is inalienable.

              • Gene Callahan says:

                No, Major, making up your own special definition for words in order to avoid difficulties in your theory is what is silly. It’s as though someone has a theory that declares, “Trees can never hurt people.” When it is pointed out that trees sometimes fall on people, he responds, “Ah, but my DEFINITION of ‘tree’ includes the provision ‘not falling.'”

                Sorry, the rules of the language game are that when you have to make up your own definition of a common word to make your point, you lose.

              • Major_Freedom says:

                No, Major, making up your own special definition for words in order to avoid difficulties in your theory is what is silly.

                I’m not making up my own special definitions. You are trying to use the issue of definitions, which are a convention, to argue against my argument. You can’t do that.

                You can define slavery any way you want, I don’t care. But you can’t use your own definition of slavery (yes, it’s your own even if you cite another person or source) to argue against another person’s argument that includes the term slavery that is defined differently.

                What is important are the meanings to which the terms refer.

                If you want to call slavery “one person thinking to himself that he owns another person,” then be my guest. I can still correct the errors in that meaning without even referring to the definition to which that understanding applies.

                You’re engaging in semantics, then hilariously you are accusing me of engaging in semantics.

              • Gene Callahan says:

                “You’re engaging in semantics, then hilariously you are accusing me of engaging in semantics.”

                “Semantics” is not like “bestiality”: there is nothing wrong with engaging in it. And I made no such accusation. What I said was very much a semantical argument: we are obligated, if mean to communicate honestly, to use words in their agreed-upon meanings. You don’t get to make up special meanings in order to win arguments. Of course “voluntary slavery” is impossible once you DEFINE slavery to be involuntary, just like “leafy trees” are impossible if you define trees to be things with no leaves. So what? That’s not an argument: it’s cheating!

                I am “engaging in semantics”: I am saying we are obliged to use words in their agreed-upon meanings, or we are playing a game.

              • Major_Freedom says:

                Semantics” is not like “bestiality

                Oh I get it now. You’re in a hospital right now and you’re locked in a room having all kinds of mental imagery.

                And I made no such accusation.

                Yes, you did. You started arguing that my chosen definition for slavery is “wrong” then you proceeded to argue off that, as if that can refute what I said given the definition I chose.

                What I said was very much a semantical argument: we are obligated, if mean to communicate honestly, to use words in their agreed-upon meanings.

                Agreed upon by whom? You? Laugh.

                You don’t get to make up special meanings in order to win arguments.

                I am not making up definitions in order to win arguments.

                I have always maintained that the definition of slavery Rothbard chose to use precludes voluntary slavery.

                Of course “voluntary slavery” is impossible once you DEFINE slavery to be involuntary

                No, voluntary slavery is impossible if you understand that slavery in the real world is involuntary.

              • Silas Barta says:

                You can define slavery any way you want, I don’t care. But you can’t use your own definition of slavery (yes, it’s your own even if you cite another person or source) to argue against another person’s argument that includes the term slavery that is defined differently.

                What is important are the meanings to which the terms refer.

                Gene_Callahan, you should be pretty ashamed that, at your ripe, learned age, someone still has to explain this to you.

                If you object to Major_Freedom’s usage of “slavery”, just point out that his argument does not apply to the same set that is entailed by the standard definition, and if there are significant instances that substantively impact Major_Freedom’s position, bring them up. Easy as pie!

                And even better — it’s a lot more productive than saying someone’s position is wrong because you can take a word’s intended meaning to be something different. It really is — I just mean, if you’re into that kind of thing.

            • Silas Barta says:

              I agree that you have trouble getting past the semantic issue. Slavery, by definition, is involuntary. What Block defends is voluntarily selling yourself into a relationship that is _silmiar_ to slavery except that it was entered into voluntarily. Block (and natural laws as advocated in this thread) does not support the kind of slavery that satisfies its definition.

              Is this too complicated for you or something?

              • Gene Callahan says:

                Silas, Block doesn’t say “sell yourself into something similar to slavery.” He says “sell yourself into slavery.” Here is the definition of slavery:
                “The state of one bound in servitude as the property of a slaveholder or household.”

                It is clearly NOT “by definition” involuntary. Here is a whole wiki page on “voluntary slavery”:
                http://en.wikipedia.org/wiki/Voluntary_slavery

                The page states that voluntary slavery was quite common once.

              • Major_Freedom says:

                Block doesn’t say “sell yourself into something similar to slavery.” He says “sell yourself into slavery.”

                That is not what Silas said. Silas didn’t say that’s what Block says about his own argument. The point is that is what Block is arguing. He is defending voluntarily selling yourself into, what Silas, myself, and Rothbard would consider to be, something similar to slavery.

                The definition you cited PRESUMES that is even coherent or rationally possible for one individual to own another individual. That is the very topic under discussion!

                It is clearly NOT “by definition” involuntary

                It clearly is involuntary by definition, if you use the definition to which the argument applies.

              • Blackadder says:

                The definition you cited PRESUMES that is even coherent or rationally possible for one individual to own another individual.

                I thought you agreed that this was possible (and legitimate), but that it wouldn’t count as slavery if the arrangement is entered into voluntarily. Is that not right?

              • Gene Callahan says:

                “The definition you cited PRESUMES that is even coherent or rationally possible for one individual to own another individual.”

                Given that millions and millions of people have lived as slaves, quite obviously it is possible! It is one thing to say it is wrong, but reality cannot be “incoherent”!

              • Major_Freedom says:

                I thought you agreed that this was possible (and legitimate), but that it wouldn’t count as slavery if the arrangement is entered into voluntarily. Is that not right?

                No, that’s not right, because if you voluntarily enter into any arrangement with anybody else, it is neither voluntary nor is it slavery.

              • Major_Freedom says:

                Given that millions and millions of people have lived as slaves, quite obviously it is possible!

                I never said slaves did not exist. I said that one person owning another is impossible.

                Slavery is, again, involuntary coerced labor. Sure, of course there were millions of people who were slaves!

              • Gene Callahan says:

                Sorry, Major, but you just do not get to make up your own definitions of words as you wish, at least not if you want to communicate successfully. The South was not just full of slaves, it was also full of slave *owners*. They bought and sold slaves all of the time. Clearly they owned them. That was wrong, but it was obviously not impossible.

              • Major_Freedom says:

                Sorry, Major, but you just do not get to make up your own definitions of words as you wish

                I’m not just making up my own definitions of words as I wish. You are. You are claiming that because some dictionary says the definition is such and such, that you believe that by agreeing with that definition, you aren’t choosing one. But you are, you just can’t see it.

                The dictionary definition that you cited, if we take the words used in the definition and understand them to mean the common usage of the terms, then it’s erroneous.

                Nobody is obligated to accept erroneous conceptions.

              • Gene Callahan says:

                That’s hilarious, Major: By choosing to stick to the commonly accepted definitions of words, I am just making up my own definitions!

              • Major_Freedom says:

                That’s hilarious, Major: By choosing to stick to the commonly accepted definitions of words, I am just making up my own definitions!

                You’re not even using the commonly accepted definition of slavery.

                The common definition of slavery is being forced to work. Some dictionaries include “treated as property.”

                What you are making up is that the definition of slavery HAS to include human property. It doesn’t. For example, the Collins English Dictionary defines slavery as:

                “…a civil relationship whereby one person has absolute power over another and controls his life, liberty, and fortune.”

                “The subjection of a person to another person, esp in being forced into work.”

                Nothing here about owning someone’s will.

                You’re just presuming that your definition is “commonly accepted,” when not only is not commonly accepted, but even if it were,it doesn’t mean the definition itself is not immune from analysis.

              • Silas Barta says:

                And apparently it’s too complicated for Gene_Callahan as well!

                Silas, Block doesn’t say “sell yourself into something similar to slavery.” He says “sell yourself into slavery.” Here is the definition of slavery:
                “The state of one bound in servitude as the property of a slaveholder or household.”

                It is clearly NOT “by definition” involuntary. Here is a whole wiki page on “voluntary slavery”:
                http://en.wikipedia.org/wiki/Voluntary_slavery

                The page states that voluntary slavery was quite common once.

                Let’s go over this slowly:

                – People can use the same term different ways in different contexts.
                – Criticizing someone’s usage as non-standard does not refute the substance of their position.
                – Forget the term slavery for moment. Can you still speak coherently about the related issues? I can. Because that’s what happens when one has a non-confused understanding of something. Here goes:

                Block believes that, under a just system, you can justly transfer to another the right to order you around on pain of various physical punishments and otherwise arbitrarily restrict your actions. However, you cannot justly take that right from another who has not voluntarily relinquished it to you. I happen to agree with Block on this (but not his positions in general). And yes, Block’s positions substantively disagrees with Rothbard (and with Major).

                In other words, for Block and me, yes, it’s _possible_ and potentially _ethically permissible_ to transfer any right you have to another person. It’s not the fact of Person A’s ownership of a non-A Person that we object to per se, but whether non-A truly consented to this rights transfer. “Ownership of another human” is thus only objectionable to the extent that that human did not consent to the ownership (and there are various reasons in plausible cases where real consent was not given), not because it is generally wrong.

                Now, do you have something responsive to say, or do you just want to muddle separate issues in an attempt to be technically correct about something?

              • Blackadder says:

                Silas,

                The problem with using a word in an unusual sense is that it creates confusion.

                For example, you say in your comment that Major Freedom agrees with Rothbard and disagrees with you and Walter Block about the legitimacy of selling someone the right to order you around on pain of punishment. Yet if you read this comment by him, specifically paragraph 18 (the one that begins “If the person who promised to provide his labor reneges”). It certainly sounds like he is agreeing with you and Block (and disagreeing with Rothbard).

                Admittedly, there are other comments by MF that seem to suggest that he disagrees with Block and supports Rothbard’s view. After 60+ comments, I am still not completely sure what MF’s position is on the issue, and I think part of the problem is that he keeps redefining words to obfuscate the inconsistencies in his position.

              • Blackadder says:

                Oops, the MF comment I was referring to is here.

              • Silas Barta says:

                @Blackadder: The problem with using a word in an unusual sense is that it creates confusion.

                Unless you define how you’re using it.

                Re Major_Freedom’s position, yeah, it does look like he’s defending Block’s position. Thanks, I hadn’t read that. It certainly does make it harder to discern which position he’s defending, but that has little to do with non-standard usage of the term “slavery”, for which he stipulates his definition.

                I guess Major_Freedom is stating my position (that you can voluntarily sell yourself into a relationship superficially resembling slavery), but that this kind of contract is not signing away your will (but rather, agreeing to certain punishments), which per his reading of Rothbard is impossible.

                But yeah, it did suprirse me there.

              • Gene Callahan says:

                “People can use the same term different ways in different contexts.
                “Criticizing someone’s usage as non-standard does not refute the substance of their position.”

                I’m sorry, Silas, when there is a substantive issue on the table, and someone instead chooses to define the issue away, they are being silly. If we are debating whether taxes should be raised or lowered, and someone comes along and says “But by definition, taxes are impossible!” the right response is “Stop being an idiot!” not, “Oh my, what an interesting, non-standard definition you have!”

                If you are having a conference on “The Church’s Role in European History” and someone arrives and says “It had none: because ‘the Church,’ as I define it, means the third moon of Uranus,” you throw him out of the conference.

                There is a substantive issue: people have very, very often in the past sold themselves into slavery. The historical term for this is “voluntary slavery.” The question is, “Should this practice be allowed?”

                “Voluntary slavery is impossible” is not an attempt to answer that question; it is an attempt to dodge it.

              • Major_Freedom says:

                Blackadder:

                The problem with using a word in an unusual sense is that it creates confusion.

                For example, you say in your comment that Major Freedom agrees with Rothbard and disagrees with you and Walter Block about the legitimacy of selling someone the right to order you around on pain of punishment. Yet if you read this comment by him, specifically paragraph 18 (the one that begins “If the person who promised to provide his labor reneges”). It certainly sounds like he is agreeing with you and Block (and disagreeing with Rothbard).

                Admittedly, there are other comments by MF that seem to suggest that he disagrees with Block and supports Rothbard’s view. After 60+ comments, I am still not completely sure what MF’s position is on the issue, and I think part of the problem is that he keeps redefining words to obfuscate the inconsistencies in his position.

                Sorry Blackadder, I can tell you honestly that I am not intentionally redefining words. In my mind it is very clear. Perhaps I suck at communicating it. I’ll do my best to summarize what my position is:

                Slavery is in general an involuntary action/treatment of another, as opposed to a voluntary action/treatment. The difference between a sex slave and a prostitute is that the sex slave is initiated with coercion or violence into performing sex acts, as opposed to the prostitute who is not, and performs sex acts on their own free will. I am sure that you will agree with me that I am using the word slave correctly here as most people would understand it.

                Now, some folks attempt to use the word slave in non-coercive scenarios. For example, folks like Noam Chomsky will use the phrase “wage slave” to describe an individual whose prospects in life are so limited, that they are faced with the choice between work for money, or death. Here, I will disagree that wage slave is the appropriate phrase, and the only reason why it would be used is to conjure up emotional responses to the reader, to convince them to take a particular political stance regarding these individuals. But for me, if an individual is not initiated with coercion, and yet is faced with “work or die” then their choice to work is voluntary. The human race as such is faced with the choice of “work or death.” Thus, saying that we have to work in order to produce in order to live is somehow coercive, in my mind conveys the notion that reality of the human condition is “enslaving.” This is a position that many mystics have held throughout the centuries, but I hold it to be dead wrong. Reality is not enslaving. Only people can enslave each other.

                Therefore, when I hear the phrase “voluntary slavery,” that to me is an oxymoron. It is an oxymoron because slavery already connotes and contains involuntarism by definition.

                Moving on then, to the notion of human property. As with all political philosophy, my principles and values when traced back always get traced back ultimately to human action. I am a praxeologist. So when I hear the phrase “one human owns another human as his property” then immediately I think of what this means in the praxeological sense. What are people doing to make this phrase applicable? Well, if A claims to own B, then what A is doing is treating B as A would treat his sneakers, or car, or furniture. A would be using some form of physical motion against B.

                Now, at this point, we don’t know what the praxeological intentions are of B. So let’s consider it. If B consents to what A does, then to me, B is not a slave, because what A and B are doing is voluntary. If A is doing to B what B does not consent to, then A is coercing B. What A is doing is involuntary according to B. Within the heading of ceorcion, there are many forms of coercion. It is in this heading that I hold slavery or some other action takes place.

                If A coerces B to hand over his money, then A is stealing from B. If A is coercing B to perform some kind of labor for the benefit of A, then A is “enslaving” B. At this point, Block and you and Callahan will say that in this latter relationship, A “owns” B. That’s fine. I know that you all are referring to the same praxeological events. For me the key is the praxeological characterization. You guys say that A owns B, I say that A is forcing B to perform labor. In the praxeological sense, they’re identical, assuming of course that B does not consent to A’s treatment of B’s body.

                Which brings me to the whole definition of slavery thing. I have not once changed the definition of slavery in my mind. Gene is having a conniption because I am not including in my definition anything about ownership, which he claims I should, because a random dictionary speaks of ownership. But I am not concerned with verbal conventions. I am concerned with what people are actually doing, using each definition under discussion. A dictionary that includes the word “ownership” in my mind has to trace back to some form of action between people, for it to make any sense to me. What are people doing such that one person is claimed to own another? Well, we’re right back to what I already said above. One person is using some form of physical nudging/force against another, to get them to do something the first person wants. And again, I’ll just ask the same questions, namely, whether or not the other person consents to this or not, etc. My position is consistent.

                Now, and importantly, this whole esoteric discussion flew off the rails because you said in response to my argument that slavery is against natural law, that wait a minute, that is not necessarily so, because Block showed that voluntary slavery should be “allowed” between A and B is they both agree, hence according to natural law, slavery is not necessarily in violation. I would have hoped that you would have instead responded to the substance of my argument against yours concerning what constitutes a crime. You said insider trading IS a crime. I said wait a minute, that isn’t necessarily so, because what constitutes a crime depends on some standard of behavior. You assumed the standard is what the government says, and I said we can also use natural law. I think the only reason why you went off on this slavery tangent is because you wanted to show me that the argument I used against you can also apply to my argument about slavery. I said that insider trading is not necessarily against natural law, and you said in response, which I think implies acceptance of what I said, that OK, but the same thing applies to my argument about slavery being against natural law. Block says voluntary slavery is not against natural law, “so there.”

                OK fine, let’s forget about whether or not voluntary slavery is against natural law. What I should have said in response to your initial response to me was to say “OK, I’ll grant your argument, but let’s put aside for the moment the issue of voluntary slavery and all of its implications, and let me ask you this. Would involuntary slavery be against natural law? Would A just walking up to B, and enslaving B, be against natural law? I am sure that you will say yes, it is. And you can say this without even granting the legitimacy of natural law itself. You can just take natural law as how it is presented, and say yes, OK, according to natural law the way natural law philosophers present it, involuntary slavery does violate it.

                This is all I actually wanted to say about crime in general. I just wanted to say that your initial claim that insider trading is a crime, because it depends on a particular standard of what constitutes criminal behavior, cannot be said to be a crime unequivocally and universally. It depends on what standard you presume for what constitutes a crime. You just assumed the standard is the government’s laws. That’s fine, that’s what most people do. But I use natural law as my standard, not what the government says. That’s why I wanted to make it clear that insider trading does not violate natural law, and thus in that framework, it is perfectly legal behavior. This is the standard that I think most people are actually using when they say things like “insider trading should not be illegal to the government.” I think people are saying this because in their mind they think “This is because insider trading is not in violation of natural law.”

                Nobody else is saying this explicitly, but I think that is the standard that Murphy was using in this article in the first place. That’s why I brought it up. I brought it up because I think that is what Murphy is getting at when he asks “Is insider trading really a crime?” Maybe I am the only one who “gets” what he meant by his usage of terms in the question, but you and Callahan and others are jumping on him for his usage of terms, playing semantics games, even though it is blatantly obvious what he means and what he is trying to say.

                Then, you started to jump on me for my usage of terms as well, claiming that the definitions I am using are not the “correct” definitions, and that I am secretly trying to obfuscate what I secretly think is an indefensible position, that has somehow been “exposed” by you and others. Nothing could be further from the truth. What I am thinking makes perfect sense to me, and so I know that if you don’t accept my arguments, it has to be because I am not communicating it properly.

                I have not redefined any words. I have only tried to argue that the definitions Block and Rothbard are using for the word “slavery” are different. Callahan initially claimed that they treated slavery is identical, but after repeated plodding by me to the contrary, he finally realized that Rothbard did consider slavery to be something different than what Block has in mind. Callahan then of course had to engage in ad hominem and ridicule Rothbard and call him crazy, as if those who use different definitions that he somehow entitles him to call them “crazy.” What’s actually crazy is his inability to see past word definitions, and understand substance.

                Silas understands the importance of substance over definitions. To him, as myself, realizing differences in definitions is not cause for getting one’s panties in a twist. It just means we have to think some more, and realize what each of us is referring to when we say various terms. Language is not so objective as you think it is. Having said that, and at the same time, I do not think that I am using outlandish definitions for the words I am using. The definition of slavery that I use is found in many dictionaries. It’s not like I am trying to redefine the meaning of “computer” to mean “edible food composed of two slices of bread and a slice of ham.”

                The definition of slavery that I use is based fully on praxeological understanding, which just so happens to be consistent with most dictionary definitions. I even provided a definition of slavery from Collins dictionary to show you and Callahan that my the definition I use is perfectly “common.” I think “enforced labor” encapsulates the meaning of slavery quite well.

                Notions of ownership and all the rest have no meaning, to me, unless they can be put into some praxeological understanding. This is why I reject the claim that one can sell oneself into slavery, if we take the words to mean the common definitions. “Selling oneself into slavery” is in the praxeological sense saying “Voluntarily engaging in involuntary behavior.” It’s a self-contradiction.

                Block does not. Block considers voluntary slavery to be conceptually valid. But this is because he defines slavery differently than myself, Rothbard, and probably Silas too. Why does he define it differently? Because he disagrees with Rothbard regarding selling one’s will to someone else. Block says that Rothbard is wrong to claim that because the will is inalienable, one cannot sell oneself into slavery.

                Block gives his reasons for this, which are in his paper that I think we all know about. I reject those reasons, which I can explain why if you want, but I have not so far because we’re still stuck on complaints about definitions, and how I am allegedly trying to dupe you by constantly changing definitions. In reality, this is just you being unable to think abstractly enough to understand meanings and concepts.

                You have claimed that Rothbard’s position on slavery is inconsistent with his other principles, on more than one occasion, and yet you have not once shown exactly what the inconsistency is. It makes it difficult to debate when you make claims without justifying them.

                At this point then, it really makes no difference to me whether you think I am being deceitful or purposefully obfuscating the issue. You and Callahan can circlejerk over definitions all you want. I should have known better, because your very first comment in this thread was herp derping over the Bob’s definition of the term “crime.”

              • Major_Freedom says:

                Gene:

                I’m sorry, Silas, when there is a substantive issue on the table, and someone instead chooses to define the issue away, they are being silly. If we are debating whether taxes should be raised or lowered, and someone comes along and says “But by definition, taxes are impossible!” the right response is “Stop being an idiot!” not, “Oh my, what an interesting, non-standard definition you have!”

                If you are having a conference on “The Church’s Role in European History” and someone arrives and says “It had none: because ‘the Church,’ as I define it, means the third moon of Uranus,” you throw him out of the conference.

                There is a substantive issue: people have very, very often in the past sold themselves into slavery. The historical term for this is “voluntary slavery.” The question is, “Should this practice be allowed?”

                “Voluntary slavery is impossible” is not an attempt to answer that question; it is an attempt to dodge it.

                OK, it is very clear that you feel “cheated.” You believe that I “redefined away” the issue.

                You claim that your definition of slavery is “correct.” But that is precisely you trying to redefine away the substance of the argument here. You use the phrase “voluntary slavery” and you take it for granted that it is a sensible concept. Why? Because you read somewhere that people have “sold themselves into slavery.”

                If you define slavery this way, as including both voluntary and involuntary forms of it, then I must ask you: What the heck does slavery mean to you, and why does it differ so much from “labor” that you have to use “slavery” instead of labor?

                Saying voluntary slavery and involuntary slavery is demolishing the coercive nature of slavery. ALL dictionary definitions of slavery define slavery, explicitly or implicitly, as including a coercive element to it. By saying voluntary slavery, YOU are redefining slavery in a way that no dictionary supports. And yet you have the gall to say that I am redefining terms? Look in the mirror, chump.

                Slavery, according to the common usage of the term, presumes a coercive, hence INVOLUNTARY nature. Thus, to say “voluntary slavery” is not only to completely ignore the substance, the meaning, of slavery, but it also ignores every single definition of it.

                You claim that “many times in the past, people have sold themselves into slavery voluntarily.” Let me guess, this happened in the bible? That would explain your contradictory understanding of slavery. At any rate, at no time in the past, present, or future will it ever be possible to sell oneself into slavery. It is precisely you who has introduced a silly definition of slavery, and it is precisely you that is evading the issue here.

                But I’m above all this you see. So if you want to define slavery as capable of including non-coercion, then so be it. I can expose your nonsense even using your own non-dictionary definition. You ask “should voluntary slavery be permitted?”

                OK, using your crackpot definition of slavery, the meaning behind that question, rephrasing the question to make it intelligible, is: “Should an individual be free to approach another individual, and ask them to accept their labor in exchange for a wage or some other recompense, and in addition, allow the other person to use physical force against their bodies in any way they see fit, including the caveat that should the laborer change his mind in the future, the other person is allowed to use force to stop their resistance, such that they are coerced into remaining a laborer?”

                This I think is the question you are asking, stripped free from your nonsensical definition of slavery.

                If we take that question at face value, then it’s not just a simple yes or no. Why? Because we have to see if this contract even makes any sense to begin with, let alone whether it is morally enforceable.

                Rothbard would look at this question and consider it to be not only unenforceable, but impossible in the first place. He would argue that this contract is impossible because an individual cannot sell his will to another person. He always retains his own will. He would thus consider this contract to be null and void, as well as being nonenforceable.

                Block on the other hand would not consider this contract to be impossible. He thinks that yes, it is possible. He thinks this because the individual’s will is not even the important issue here. It’s their bodies that matter. A voluntary slave is selling their bodies, not their will.

                My own position regarding this understanding is that it cannot be the case. It is impossible to buy someone’s body but leaving their will behind. Where people’s bodies go, so does their will go. Block knows this, so he has to include an argument from Kinsella, which is that it is possible to sell one’s body and leave one’s will behind. For example, someone can get a particular lobotomy, such that their bodies can be used in any way a slave-master wants, and they would not have a will to reject anything that happens to them. This allegedly serves as a refutation of Rothbard’s inherent claim that one can sell one’s body and not one’s will. But this argument fails because it is denying and switching the context in which Rothbard made the claim. When Rothbard considers a human, he considers them to have their reason. For Block to introduce a human with a lobotomy, who thus has no observable will, is just proposing a non-human. He is proposing an entity that is human-like. A human without reason is not a human to Rothbard, because Rothbard holds the Aristotelean meaning of humans as “the rational animal.” Rothbard’s argument depends on the individual’s reason and will being present. Block thus completely drops the context in which Rothbard makes the argument.

                We’re not talking about mindless automatons who can be manipulated at the will of others with no resistance. If we can include mindless automatons, then why not unconscious individuals? Why not even individual’s whose biological functions have stopped? Why is Block permitted to include an individual without any will, but implicitly we have to assume everything else is present? Can a dead body be considered a slave? Why not? Is it because a dead body is not a human? What makes us human? If Block says that there has to be biological function present, then why can’t Rothbard argue that there has to be a will present as well? To say “biological function is necessary, but not the will” is totally arbitrary. A human is one who has reason. Anything less and the context changes.

                So Block’s definition of what makes a human a human means that not only is Block defining slavery differently than Rothbard, but he is also defining human differently than Rothbard. No wonder he disagrees with Rothbard. He’s talking past what Rothbard meant. You and Blackadder are doing the exact same thing. You are coming to the table with your own conception of what it means to be a slave, and you are turning the issue upside down, by understanding slavery to be capable of being voluntary, when the entire meaning of slavery includes involuntary coercion.

                The way you define slavery, is actually just “labor.” You define slavery as “labor.” This is why you perceive voluntary forms of it and involuntary forms of it, when in reality the meaning of slavery MUST include a coercive involuntary nature. A person who willingly performs labor for another, and willingly allows the other to treat their bodies in any way they want, is NOT a slave. For such an agreement would not have any coercive element to it, which slavery must for it to take place.

                I am not redefining terms. YOU are. YOU are equivocating voluntary with involuntary labor, and claiming that slavery applies to both. In no case in history has anyone ever sold themselves into slavery. Slavery is only possible if the individual is coerced by violence into performing involuntary labor. “Selling oneself into slavery” is in reality just a voluntary wage contract with voluntary physical treatments of one’s body.

                So what you consider to be “voluntary slavery” is in reality just a rather unorthodox wage contract, and what you would consider to be “involuntary slavery” is in reality just slavery. The involuntary attribute is superfluous.

              • Blackadder says:

                Silas,

                In theory one could say “for purposes of this discussion I define X as Y” and it shouldn’t be a problem. In practice, though, the tendency is for people to slip back into using the term in the standard sense (perhaps without even realizing it). At the very least you have to use part of your brain to constantly say to yourself “okay, when he says X what he really means is Y” which will be distracting.

                And of course most of the time people don’t explicitly say that they are using a nonstandard definition. I’ve had conversations with Rothbardians, for example, where they will begin by saying that they absolutely reject violence. If you press them a little, they say that by “absolutely reject violence” they mean “absolutely reject the initiation of violence.” If you press them further, it turns out that they are using a highly nonstandard definition of violence such that if a guy walks across my field and I shoot him dead he is the one who was using violence against me. But no Rothbardian has ever started a conversation by saying “for purposes of this conversation I define violence as consisting only in actions that violate property rights as determined by Rothbardian principles.” You have to pry it out of them.

              • Silas Barta says:

                @Gene_Callahan: The question is, “Should this practice be allowed?”

                “Voluntary slavery is impossible” is not an attempt to answer that question; it is an attempt to dodge it.

                If that’s all that the commenters were saying, ti would be a dodge. But since they defined what they meant, and specified the _substance_ of what should and should not be allowed — you know, the part of their posts you consistently ignore — such commenters were dodging nothing.

              • Silas Barta says:

                Sorry to hear that, Blackadder, but if it makes you feel any better, you avoid that problem, but make yourself equally hard to communicate with through other “is he just playing dumb to make a point?” maneuvers.

    • bobmurphy says:

      Well OK, but that’s what the word “really” was doing in the title. And I think I was crystal clear in the article what I meant.

      • Gene Callahan says:

        No, Bob, that’s not what “really” does. “Really” here implies that there is nothing wrong with it, as well as it should not be a crime. There are different answers to the questions: “SHOULD holding the ball for over 24 seconds be against the rules in pro basketball?” and “IS holding the ball or over 24 seconds be against the rules in pro basketball?”

        One might answer “no” to the first, but answering “no” to the second says something is wrong with the person answering.

        And so with the stock market and insider trading: For better or worse, the governing authority for the securities market has declared insider trading against the rules. One may sensibly work to change that rule, but it nonsense to declare that right now it is not “really” a crime. Since insider traders work hard to HIDE what they are doing (Rajaratnam went to great lengths to hide his activities), it is cheating. It is gaining an advantage not open to those who play by the rules. It is as though one adjusted the 24-second clock on one’s own court to tick more slowly than the visitor’s clock. It is no defense of such an activity to say, “Hey, I’m against the 24-second clock.”

        One may work to have a rule one does not like changed. One may not sign up for a game, knowing the rules, agreeing to play by them, and then secretly try to get around them. That is “really” a crime, and morally wrong to boot.

        • Gene Callahan says:

          Sorry about the extra “be.”

        • Major_Freedom says:

          “Really” here implies that there is nothing wrong with it, as well as it should not be a crime.

          That’s exactly what Murphy meant.

          You and Blackadder are criticizing Murphy in a way that would imply he doesn’t even know what the law on insider trading happens to be.

          At best, you’re only pointing out a quibble over grammar. Big deal. It’s plainly obvious what he meant by it if you read the article. He’s making a case for legalization, based on economic principles. He’s not finding some law in the tens of thousands of pages of federal regulations that “really” make insider trading legal.

          Come on guys, it’s like you’re complaining about the weather during a nuclear bomb detonation. Focus people.

          • Gene Callahan says:

            “That’s exactly what Murphy meant.”

            Yes, I know.

            • Major_Freedom says:

              Than why the “No, Bob.”?

              • Gene Callahan says:

                Because when he was saying “That’s what ‘really’ does,” he was only referencing the “it should not be a crime” half, and neglecting the “there is nothing wrong with it” part.

              • Major_Freedom says:

                One follows from the other. He wasn’t neglecting one but not the other.

                “it should not be a crime” follows from “there is nothing wrong with it.”

    • Silas Barta says:

      Way to read, Addy. (I’m getting deja vu on that for some reason.)

  3. Desolation Jones says:

    I don’t buy the whole “liberal public education is brainwashing our kids” line, but I have to admit insider trading is one of those things I was taught to be bad and I never really questioned until somewhat recently. The first time I heard a libertarian arguing that it wasn’t bad, I was thinking “WHAT?? Haven’t’ you seen the movie Wall Street?” It just seemed like a given that it was bad and everyone in the world agreed. I’ve changed my mind since then though.

    • Blackadder says:

      Perhaps this is another indication of my being weird, but the idea that insider trading would be illegal always struck me as being bizarre. I could sort of understand prohibiting the CEO of a company from acting on inside information, but if the CEO lets slip to a friend that his stock is about to tank the idea that the friend could go to jail for acting on the information seemed very strange.

    • Silas Barta says:

      Be careful about the fallacy of generalizing from fictional evidence. (FWIW, insider trading was against the law at the time the movie was made, but the insider trading in the key plot points did not violate the law as written then.)

  4. Scott H. says:

    This gets a bit into what function the SEC serves (this law is a subset of the SECs responsibility). I would say the SEC’s function is to make the general public believe that they have as good a chance as anyone to make money in the market, and that there aren’t other people who will be paid first and paid best. Once the average investor feels its not entirely fair, then their demand for market shares will drop precipitously.

    Personally, I feel the SEC creates a misplaced trust in the entire investing practice — trust that, while advertised, has never been earned.

  5. ekeyra says:

    Everyone knows all the SEC does is look at spankwire all day.

    http://abcnews.go.com/m/story?id=10452544&sid=248

    “That’s less than 1 percent of the agency’s 3,500 employees but 17 of the alleged offenders were senior SEC officers whose salaries ranged from $100,000 to $222,000 per year. ”

    “One senior attorney at SEC headquarters in Washington spent up to eight hours a day accessing Internet porn, according to the report, which has yet to be released. When he filled all the space on his government computer with pornographic images, he downloaded more to CDs and DVDs that accumulated in boxes in his offices.

    An SEC accountant attempted to access porn websites 1,800 times in a two-week period and had 600 pornographic images on her computer hard drive.

    Another SEC accountant used his SEC-issued computer to upload his own sexually explicit videos onto porn websites he joined. “

  6. Steve Maughan says:

    That’s all very well for when the stock goes up. What about when the news is bad and the stock goes down? Suppose the trader overheard bad news and shorted the the stock. There is now a loser – the person who sold the put option. What about this case?

    • bobmurphy says:

      If you think the stock going down hurts the seller of a put option, then you shouldn’t have agreed with my original analysis either. When the inside trader hears good news and buys, doesn’t he thereby hurt the seller of a call option?

      • Raja Khan says:

        I second that. When the news does come out the short position loses after the price rise and the long position loses after price decline. This loss occurs irrespective of whether the insider trading occurs or not. Yes, the gain/loss occurs a little earlier than without insider trader’s intervention.

        From my own trading experience using technical analysis (using prices and volume mostly) the event that a large buyer/seller (showing higher traces of volume) buys something before the good news comes out raises the price (or stabalizes a falling price) and gives and indication ‘earlier’ than the release of the news that demand is increasing.

        This small hint due to price rise itself is a small sign that long position is doing well and short position is weakening before the major news related big move has taken place. It’s an earlier indication for shorts to get out with smaller losses (or reduction in profits) and for longs to hang in there or increase position size. The insider is conveying the information via the pricing mechanism. And instead of one sudden burst of gap up or down in case of stocks the price is relatively slowly moving in the direction of the news prior to the news giving time to reposition.

      • Steve Maughan says:

        The difference is the trader is actually *trading with* the seller of a put option whereas he doesn’t trade with the seller of the call option (i.e. no deciept).

        Suppose the stock is $10. The trader knows that there is bad news around the corner. In effect he knows that the future value of the stock will be ~$5. He then goes to a seller of put options (who does not have the insider knowledge) and says, “I will buy a put option from you for $0.5 per share”, knowing that it’s a deadcert win. So in this case there is a loser who trades with a winner.

        You could argue that it’s the responsibility of the put seller to validate the value of the put option. So the put seller, and only the put seller, is to blame for their loss i.e. there is a loser but it’s their own fault.

        The follow-on question would be what would be the impact of de-criminalizing insider trading. I guess it may lead to higher trading costs (due to the extra analysis and warrents which would be added to the contracts). Wouldn’t this lead to a less liquid stock market?

        All interesting stuff!

        Steve

        • Major_Freedom says:

          The difference is the trader is actually *trading with* the seller of a put option whereas he doesn’t trade with the seller of the call option (i.e. no deciept).

          That’s not necessarily the case. The buyer of a put option, if exercised, sends the stock to a clearing institution, not the seller of the put option. The buyer of a call option, if exercised, buys the stock from the clearing institution, not the seller of the call option.

          He who sells a put option or a call option is actually selling it to a clearing institution. Once the buyer exercises, the clearing institution will facilitate the actual ownership trade, by either asking the call seller for the stock, or asking the put buyer for the stock.

          To guard against option writer reneging, the clearing institution demands that the writers put up a cash margin. That pool of margins, in addition to call and put premiums, is what they use to pay off the differences in positions of option traders if there is no net physical delivery positions.

          Suppose the stock is $10. The trader knows that there is bad news around the corner. In effect he knows that the future value of the stock will be ~$5. He then goes to a seller of put options (who does not have the insider knowledge) and says, “I will buy a put option from you for $0.5 per share”, knowing that it’s a deadcert win. So in this case there is a loser who trades with a winner.

          That occurs even if the put seller has inside knowledge, but is wrong about the future price.

          Having all information does not guarantee correct stock price expectations. You said “In effect he knows that the future value of the stock will be ~$5.” But nobody can “know” the future price. They can only make expectations. People who have the same information do not necessarily lead them to making the same expectations of stock prices. Yes, information is what enables more “rational” decisions, but information is not a right.

          You could argue that it’s the responsibility of the put seller to validate the value of the put option. So the put seller, and only the put seller, is to blame for their loss i.e. there is a loser but it’s their own fault.

          The follow-on question would be what would be the impact of de-criminalizing insider trading. I guess it may lead to higher trading costs (due to the extra analysis and warrents which would be added to the contracts). Wouldn’t this lead to a less liquid stock market?

          Do those with no knowledge of inside information really contribute to the stock market the way supporters of insider trading laws conceive? Is it always true that more money put into the stock market is always beneficial? What if the stock market is rigged? Should people who are naive still invest? Was the stock market illiquid prior to the 1930s, when insider trading laws were greatly expanded to more or less resemble today’s laws? The US was already the world’s most prosperous nation by that time, and we all know that savings and investment are the key to prosperity.

          • Steve Maughan says:

            All interesting stuff.

            Clearing house or no clearing house there is still a loser in the put sell case. The only value created is a forward signal to the market of a price drop. Since the insider knowledge is likely to be limited (almost by definition) to a small group, the forward signal is of limited value.

            True, we cannot know the exact value of a stock ahead of time. But if there’s a biotech with one molecule in development and you work for the FDA and you know the molecule is not going to be approved, you can be almost certain the stock will lose most of its value.

            I agree we don’t have a right to information. And by decriminalizing insider trading you would certainly increase personal responsibility of the traders. This may well be worthwhile in the long-run.

            Steve

        • bobmurphy says:

          Steve,

          I’m not dodging your question, but I still don’t see why you are making a distinction between good and bad news. You wrote:

          Suppose the stock is $10. The trader knows that there is bad news around the corner. In effect he knows that the future value of the stock will be ~$5. He then goes to a seller of put options (who does not have the insider knowledge) and says, “I will buy a put option from you for $0.5 per share”, knowing that it’s a deadcert win. So in this case there is a loser who trades with a winner.

          So why can’t I do this?

          Suppose the stock is $10. The trader knows that there is good news around the corner. In effect he knows that the future value of the stock will be ~$15. He then goes to a seller of call options (who does not have the insider knowledge) and says, “I will buy a call option from you for $0.5 per share”, knowing that it’s a deadcert win. So in this case there is a loser who trades with a winner.

          • Steve Maughan says:

            OK – I now see your point regarding the call option – I’d misinterpreted.

            I’m almost convinced.

            I’m intrigued by the concept of “do we have a right to knowledge”. I guess the only reasonable answer is “no”. Which can only lead to insider trading being legal.

            A couple of things still irk me.

            First is the reduced liquidity of the market. If I’m a trader, I now need to ask, “who is this guy and what does he know that I don’t”. Knowing that he could legally be selling me a box of rocks will mean a higher cost for each transaction, which in turn reduces the number of transactions. I don’t think the benefit of signalling to the market of coming price changes is significant because the insider knowledge will likely be limited to only a few individuals.

            The second thing that gives me pause is if insider trading is made legal, an executive of the company could willfully destroy the value a company and profit from it. Suppose I was made CEO of a multi billion dollar enterprise e.g. Microsoft. I could decide to recall all Windows 7 installations, offering full money back. I could do this on the basis of a new security threat. Obviously this would be devastating to Microsoft. But before the information was public I could short the stock BIG time. I would make a killing. This doesn’t seem right. On the other hand, you could argue that this behavior cannot be prevented with existing laws. I’d just need to short the stock before I started the sabotage process. Even so, it makes profiting from sabotage much easier.

            Steve

  7. GSL says:

    Excellent post. I’ve never understood why insider trading is supposed to be illegal. I mean, except for politicians’ regular need to punish rich people for having money.

  8. Tel says:

    First instinct to to point out that since the crime is getting caught, and since insider traders almost never get caught, we can conclude that insider trading is very rarely a crime.

    However, there is a longer explanation…

    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.

    I quite agree, and out of these people attempting to buy shares, are some percentage who would like to invest their money as some sort of saving for the future. They bring to the market not just fresh investment money, but also information in the form of their selection of likely looking candidate stocks. If these people discover that a significant information asymmetry exists between themselves and other buyers, they will say, “this game is rigged” and logically take both their money and their information elsewhere… thus making the market as a whole poorer in the process.

    One might be tempted to argue that the insider information is significantly more accurate than the somewhat random guesswork of the “outsider traders”, however most of the insider information is only of value on a very short term basis, while the market as a whole benefits from clues to the long term outlook.

    Now I have demonstrated that insider trading is bad for the market, I will also quickly point out that since the SEC fails to catch significant numbers of insider traders (and they certainly don’t come anywhere close to stamping the practice out completely) we must consider whether the currently attempted “cure is worse than the disease”. Having a system of selective enforcement can easily lend itself to corruption, and once corruption sets in the whole market becomes even more unfriendly to investors, and vastly less efficient.

    Note that information asymmetries exist all over the place and are not special to the share market. A mechanic buying a second hand car is more likely to get value for money than an accountant buying a second hand car. However, forces that push down the price of second hand cars also push up the price of new cars… thus the accountant buys a new car (with the biggest warranty she can get) and in effect the accountant is buying both the physical car, and the information that this car has no hidden bodgied up repairs, etc. Information becomes a product (hardly a shock to consultants and IT engineers).

  9. judah says:

    the reason why insider trading is a crime has nothing to do with the fact that this person seemed to have made money at everyone’s expense. the reason is that in a publicly traded market the price that i am paying is due to the amount of information that is available now. so if someone where to have more information than someone else he or she can make a lot more money. now that is true in every market that we have such as a previous poster noted by a used car market. a car mechanic has more information than the typical car buyer so he is at a better position to make money. now if insider trading where legal then business executives would keep information from the public so that their knowledge is worth even more. this would lead to executives using information to control the price of their stocks even though the company they represent shouldnt be valued at that level. its has the same impact on the economy as would cooking the books to make it appear as if a company is doing better than it really is

    • Tel says:

      Although I agree with everything you have written — you have not addressed the problem that the SEC has limited resources, and insider trading is notoriously difficult to identify and prosecute.

      To me it makes more sense for enforcement resources to be put into ensuring that companies deliver honest reports to their shareholders (which is a lot easier to check up on) and providing a system for employees to anonymously report “tip offs” if they believe their company is breaking the law.

      For example, Enron was caught with two sets of books, one for operational purposes and one for reporting purposes. This is a far bigger danger than insider trading, and more worthy of attention (IMHO).

      • Judah says:

        by saying that since something isnt enforceable therefore it should be allowed is not a logical argument. if there arent enough cops in a city to stop a specific crime then you shouldnt make that crime legal just so there is less crime. the question here is whether or not it should be a crime or not. it isnt a question of how well it can be enforced. bob posed a question regarding why it should be illegal if i am not stealing anything, and i at least i think i did point out a reason as to why it should be illegal by drawing a comparison to cooking the books. the potential ramifications of such actions are very similar and therefore both should be illegal. you do raise a good point that it is hard to enforce but if you stop a crime even only 10 percent of the time it is 10 percent less crime going on plus the additional percent that people dont commit due to the slight fear of getting caught.

  10. bobmurphy says:

    Gene, I’m responding to you down here because I think it’s easier for people to see “new” comments this way… You wrote:

    And so with the stock market and insider trading: For better or worse, the governing authority for the securities market has declared insider trading against the rules.

    No Gene, I don’t think this will work. Or at the very least, the certainty with which you are lecturing me, is misplaced.

    Suppose in the 1850s a guy went to jail for harboring a fugitive slave. The townsfolk refer to him as a criminal, but his son says, “My daddy wasn’t really a criminal!” Then G-Man Gene trots out of the saloon and sets the boy straight. “Your pappy knew full well he was breaking the law. Why, that’s why he hid all them slaves under the floorboards. The rightful authorities in this country have said what your pappy did was a crime. If you have a problem with that, young man, you can write to your congressman. We are a nation of rules. Why, imagine a game called basketball had been invented, and there were teams killing the clock once they got a big lead, so they changed the rules to have a 24-second shot clock. I bet your pappy would cheat in that game too.”

    If you don’t like that example, since times were different, what about Janet Reno burning a bunch of babies to death? I would say, “She committed a crime.” Or Glenn Greenwald routinely says, “George Bush committed war crimes.” And yet, Reno and Bush aren’t in jail. So I guess Greenwald and I are speaking gibberish, right?

    Note, you don’t have to agree with what I’m saying. But you’re acting like I’m redefining “purple” or something, when what I am doing is quite defensible.

    • Silas Barta says:

      In that example, Gene_Callahan would probably argue about the unfairness of slaveowners having “played by the rules”,

      – having honestly bought those human beings “fair and square”,
      – reasonably expecting they could extract the full lifetime value from those blacks they bought at the auction for the discounted present value,
      -reasonably expecting that if the [obscenity] got too uppity, their fellow citizens, per the social contract we’re all obligated to follow, would grab those [obscenity] and bring them back to the plantation,

      … and then someone’s pappy decided to throw a kink in all that by hiding the mean, freeloader black folks under his floorboards so they would avoid providing the labor they owe fair and square. Hey, plantation owners have the right to profit off of forcing blacks to work in the field! The law says so, you anarchist!

  11. Dave says:

    It’s very important for the Wall Street game to appear somewhat fair. If the little guy feels that the game is hopelessly rigged he will not want to invest in equities. Insider trading seems unfair (picture the child in each of us saying, “No fair, he got three cookies and I only got two!” It makes us feel better when Mom takes that extra cookie from our brother.) Insider trading is illegal, because it is bad PR for the financial establishment.

    I greatly appreciate the libertarian view on a lot of these issues of what should and shouldn’t be illegal. It takes the emotion out and reduces these arguments to the logical basics. While I was reading Walter Block’s “Defending the Undefendable”, it shocked me that I could not come up with a logical reason why blackmail should be illegal (But it’s soooo mean!)

  12. MamMoTh says:

    If insider trading is not a crime, then neither is counterfeiting.

    • Steve Maughan says:

      Interesting!

    • Raja Khan says:

      Counterfieiting is a crime becuase goverment has declared it as a crime to prevent competition and maintain its money printing power.

      • MamMoTh says:

        * counterfeiting does not only apply to currency

        * I thought austrians were against counterfeiting money not just against the monopoly

        * government has the monopoly of its own IOUs. you can issue yours if you want and someone accepts them

        * government does not have the monopoly on coconuts. Murphy is already investing and saving coconuts

        • Raja Khan says:

          * counterfeiting does not only apply to currency

          I don’t understand the above.

          * I thought austrians were against counterfeiting money not just against the monopoly

          Austrians are not against the monopoly. In a free market as I understand monopoply will sooner or later be challenged by competition. Monopolies arise because governmental bodies grant monopoly powers to industries or companies.

          * government has the monopoly of its own IOUs. you can issue yours if you want and someone accepts them.

          You are right, I can issues my own IOUs and I do when borrowing from a friend etc. The problem with goverment is that it taxes me to unjustly to issue its IOUs or prints money to pay for them. Government is not in a business and has to either tax or print to pay.

          * government does not have the monopoly on coconuts. Murphy is already investing and saving coconuts.

          I have no problem with Murphy hoarding coconuts. If future conditions don’t support his hoarding coconuts I don’t lose my money for his incorrect judgement.