= On Aug 22, 2007, at 12:18 PM, Kevin Lochner wrote:

As daniel has pointed out, the market is not = perfect.=A0 A tempting = conclusion to draw from that observation is "ok, let's fix it".=A0 I think there is reason for = restraint.

As the other students of economics should agree, = there are cases where you can't explicitly determine the outcome of = production & allocation and simultaneously have proper incentives = for everyone in society.=A0 = This doesn't necessarily preclude a "fix" to markets, but it = indicates that getting to a "better" outcome is possibly harder than we = imagine.=A0 So maybe you = come up with a rule that "fixes" the instances of small company buyouts, = but maybe that imposes other costs on the market and society that = outweigh the gains.=A0 By = analogy, I don't like getting dust in my eye, but that doesn't motivate = me to wear protective goggles all day.

It's easy to = measure the tradeoff for such mundane cases, but the issue is much more = subtle in the context of the global economy.=A0 Given that each new = regulation imposes some cost with respect to compliance while inherently = limiting individual freedom, my position is that we should err on the = side of free markets (and more generally, freedom) unless the case for = regulation is compelling.=A0 = Examples of regulation gone awry include our disaster of a tax = code and the
criminalization of drug = use.=A0 Once imposed, such = regulation is not quickly nor easily revoked.

- = k

On Wed, = 22 Aug 2007, Dave Morris wrote:

That's a = good point- if it's already criminal, we've done what we can to correct = it, which ideally solves the Enron case.

The real = problem is in the case where what the evil CEO is doing is legal. Like = taking a small not for profit company for profit and making a ton off = the stock sales selling it to a big company that wrecks it. The small = company looks good on the stock market temporarily, and the big company = looks good temporarily for buying it, but when the big company strategy = ruins the value of the small company everything is lost in the long run. = But that happens 5 years later, so short selling over that period is = impractical, or just not the norm, for most investors, so the market = doesn't seem to correct for it.

Any suggestions or counter = arguments for that example?

On Aug 22, 2007, at 10:31 AM, Yevgeniy Vorobeychik = wrote:

=
I think the argument to the = "evil CEO" examples would run as follows. Suppose that CEO does = something that he knows will cause the company's imminent collapse.=A0 Naturally, he's the only one = who knows this.=A0 The = problem with the reasoning below is the implicit assumption that the CEO = will not play the stock market.=A0 = But in theory, the CEO should short cell shares until the price = comes down to roughly what he/she expects it to be. In the end, he'll = make additional billions of dollars, while the market price will = accurately forcast imminent collapse.=A0 That would be the theory. In = reality, something seems to prevent a CEO from doing just that (at least = conspicuously).=A0 One = would be the laws against insider trading. Another would be that he is = in effect giving evidence to his own wrongdoing.=A0 There is also the issue of = transaction costs, but that's probably more minor here.
I think the problem of "evil CEO" is really entirely = separate from that of stock market inaccuracy.=A0 If the CEO is indeed evil, = you certainly to want to create additional incentives for wrongdoing by = creating another opportunity for them to cash in.=A0 The issue may be insufficient = enforcement of accounting crimes, etc. on the part of company = executives. That's where the incentives really need to be to = "behave".
On Wed, 22 Aug 2007, Dave Morris = wrote:

You point out = some potential benefits, and others have pointed out specific examples. = I agree with these, but my argument is not that the stock market should = be abolished. It does provide value. My argument is that it's got flaws = that are getting worse, and thus should be recognized.
What of examples like Enron where executives = obfuscated the records, made millions to billions, then screwed everyone = else when it collapsed? Or the CEOs who inflate the value, cash out in = the stock market, then leave before the company collapses into ruins in = a series of buyouts? In these cases the stock market and the traders and = the collective wisdom are easily fooled, and get fooled over and over = again, at least in the short run. But the way the stock market works = incentivizes these short term illusions because it creates the ability = to get really rich because of them. As stocks trade faster and easier = and information becomes more distant from the traders this will become = more prevalent, or so I believe.
How do we fix = that without removing the collective wisdom evaluation of corporate = strategies? =A0 Though = additionally I'll put my faith in a handful of experts over the = collective wisdom any day. I think the collective wisdom lags and = follows those who really understand the companies and technology = anyway.
As far as short-selling = companies who are pursuing the above strategies, I think that is a good = strategy, and I'm sure there are some who do make a profit doing that... = but it requires longer term thinking and longer term strategies to do = so, and the fact that we're moving away that as a society means that = such strategies won't counterbalance the problem. =A0 Though again the stock market = alone isn't the only cause of short term thinking. I just think it's one = piece of the issue, and perhaps one that could be adjusted to help = improve it.
Dave
On Aug 21, 2007, at 8:44 PM, Daniel Reeves = wrote:

Not only do I = disagree with Dave, I'll go so far as to claim he disagrees with his own = position.=A0 If not, Dave, = why not make a killing shorting stock of the next company to do a round = of layoffs for the sake of a short term boost in stock price?=A0 The market is smarter than we = think.
Nor do I have a beef with day = traders.=A0 Either they're = providing valuable information to the market or they're going to get = smacked hard.=A0 (In = expectation at least.)=A0 = In any case, they're paying a fair rate for the money they borrow = and no matter how little time they own a stock they are, in aggregate, = contributing to the investment in those companies. (And short-selling is = just borrowing stock, later buying it to pay back the loan, so nothing = slimy about that, contrary to popular conception.)
I used to be like Dave, pointing to a litany of = "obvious" flaws in the market (stock market or "the market" more = generally, like microsoft being sucky (for me) yet rich).=A0 But the market had a habit of = being smarter than me and I've learned some humility in this = regard.
As for Dave's specific = allegation (the stock market focuses on short term gains), I don't think = that's true.=A0 The stock = price estimates (the per-share net present value of) the cumulative = future cash flow of the company.=A0 = The stock market estimates that better than any other known = mechanism.=A0 It is of = course prone to fits of hysteria but when it does it's taking a very = *long term* (fantasy) view.
That said, = there are cases where markets fail and that is in the face of = externalities. A classic example of an externality is the Tragedy of the = Commons in which a bunch of farmers ruin a common grazing field because = no one person has incentive to ration their use of it if no one else is. = It's analogous to traffic congestion which is one of several reasons we = need higher taxes (gas, roads) on driving. [1]
The need to tax pollution is another classic = example.
Eugene's Starving Artist is an = interesting example of a possible market failure.=A0 That might be explained in = terms of externalities (positive this time) if the art was of a kind = that couldn't be charged for by usage (public sculpture perhaps).=A0 In other words, you have = free-riders.
Eugene's Down On Their Luck = example I believe is an argument for risk pooling, one form of which is = the "social safety net", ie, welfare.=A0 It seems that participation = should be optional though.
Clare's = Parasite CEO example I'm still thinking about...
Danny
[1] = See:
http://freakonomics.blogs.nytimes.com/2007/06/18/hurray-for-hi= gh-gas-prices/
and add to the list that = cars are dangerous to cyclists and skaters!
--- \/ = =A0 FROM Dave Morris AT = 07.08.20 15:21 (Yesterday) =A0 = \/ ---

I'll = rephrase my claim:
"Playing the stock market = with the objective of short term gains does not contribute to society, = and in fact actively harms it."
But I do = think that is true. The stock market has some benefits, and there are = good reasons to have such a thing around, but ours needs help.
Stock prices can be a measurement of a companies = performance, but it can too easily be influenced in the short term for = short term reasons. I feel like it has become common for companies to = trim benefits packages, switch CEOs, cut R&D, and do other things = which provide a benefit the company for one quarter, and thus make the = stock market evaluation bounce when their profits look good for a = moment, but which have serious long term costs. The CEOs in charge, and = the investors, like this strategy because they can profit from it, then = get out before the stock goes down again in the long run.
Many people lose from this- not only those holding = the stocks when the company goes down in general, but the employees of = the company, and those using the services of the company. The stock = market encourages short term thinking for short term gain and our = country has become swept up in this. I personally know people who have = had their companies destroyed this way. I feel like people invest not so = much with an idea for building long term stability and high probability = of reasonable returns, but as more of a get rich quick theme. And = furthermore computer trading and other features have made it easier to = trade shorter and shorter term with little understanding or analysis of = the companies involved. So stock values become influenced by more = trivial surface things, because that's all these day traders have time = to see. So now companies are making trivial surface changes to satisfy = the whim of short term investors, at long term cost.
There was a big discussion on NPR about hedge funds, = stock market trading of mortgages, and how it led to the creation of, = and current bursting of, the housing market bubble. Part of the problem = was that stock market investing had become too disassociated from the = things being invested in and the real long term values = thereof.
Meanwhile most people, who work = for the companies thus traded, suffer. Ironically it's their own = investment in stock market based IRAs that helps drive the = process.
So I would argue that the system = needs to change. Not that we need to get rid of the stock market = entirely, but that we need to shift the way it works to put the focus = back on valuing companies that have good long term strategies, and less = on valuing get rich quick schemes. What if you had to own a stock for at = least a month before you could resell it? Or a week? Or a year? I'm not = sure where the right number would be, but it really seems to me that = traders who sign on in the morning, borrow $10M from a bank, trade all = day back and forth, return the $10M at the end of the day having made = $100k, they aren't really helping society, and could be actually harming = it in some real and significant ways.
Of = course part of this also is changing the attitudes of people and whether = they should be looking to get rich quick at any expense, or whether they = should be looking to help themselves, and incidentally also society, in = the long run. But from a top down approach at least we can put in = mechanisms that are designed to encourage the latter instead of the = former. We can't force anything, and I wouldn't want that level of = government control, but right now I feel like we strong encouragements = to the opposite of what we want.
In the = meantime I'll make sure that my company is never publicly traded so I = don't have to worry about it. :-)
On Aug 20, 2007, at 1:29 PM, = Kevin Lochner wrote:

I have to take issue with Dave Morris re: "Playing = the stock market does not contribute to society."
Not only does a company's stock price influence its = access to capital, but the respective stock prices of all companies = provide information about the state of the economy that a ceo or = entrepeneur may use in making strategic corporate decisions.=A0 Stock prices are determined = primarily by people who are "playing the stock market".
Investing in new companies does. It's a fine line, = but

I think we've = gotten too much separation of rich and poor in our society because of = the way our stock market currently operates, and that could use some = correction.=A0 I agree that = inheritance taxes are good as well, to help prevent too many generations = of people staying rich for free. But we should try to reign in the = various tricks which exist to leverage large sums of cash into even = larger sums via short term tricks in business and stocks without = actually contributing anything. =A0 = Not only do they take funds from people with less, they hurt the = country overall.
But he is also correct- there's = a wide variance of skill and motivation in people, so there should be a = wide variance in income levels. I'd accept a factor of 100 variance from = top to bottom in salary as a reasonable maximum in relative value to = society that a person could be. Some people bust their asses = continuously to help the world. Some people actively try to live off of = others without contributing anything.=A0 =A0 I do have a problem with = the factor of 1000 or 10000 variances that sometimes occur, but those = are obvious flaws that are difficult to correct.
Interesting to consider. :-)
Dave
On Aug 20, = 2007, at 10:16 AM, Daniel Reeves wrote:

We've been debating this = essay
http://www.paulgraham.com/gap.= html
and I thought I'd move it to = improvetheworld...
I'll start:=A0 Graham is so right!=A0 The income gap between the = rich and the poor is wonderful!
Actually it = started more as a debate about the nature of capitalism and interest = ("why should money 'grow'?").=A0 = Here was the gist:
* [the = economy] is a zero-sum game, isn't it?
- = no
* those earning money are taking it away, even = if only indirectly, from
other people, = no?
- no, not if you think in terms = of wealth (wealth =3D stuff you want,
money =3D = way to transfer wealth)
* Or am I = totally simplifying the haves vs. the have-nots with my pie
metaphor?
- yes, that's = precisely the Daddy Model of Wealth!
* Is it = THEORETICALLY possible for no one to owe any money at all in = this
world, i.e., that everyone just = has money that "grows"? Or does money
only = grow if it is taken away from others?
- You're = right, not possible, but for the opposite reason of what you = seem
to be suggesting.=A0 You grow money by giving it = to someone (lending it),
not by taking = it away.
It even got a bit heated, along = the lines of "Trixie, I don't think it's right for you to lash out = against capitalistic/yootlicious ideas without grokking the answers to = your questions [above]".
Oh, and I = offered a yootle to the first person who could answer the = quasiphilosophical question why money *should* grow, with the hint that = it has to do with human mortality.=A0= I believe that's the only reason that holds in all = circumstances.
In any case, Trixie wanted to = resume the debate and this is clearly the place to do it!
DO NOT CHANGE THE SUBJECT LINE WHEN YOU REPLY (so = it's easy for those not interested in this debate to delete the whole = thread).
Ok, go!
Danny
--=A0
http://ai.eecs.umich.edu/= people/dreeves=A0 - = -=A0 search://"Daniel = Reeves"
"Everything that can be invented = has been invented."
-- Charles H. Duell, = Commissioner, U.S. Office of Patents, 1899.

Dave Morris
cell: = 734-476-8769
http://www-personal.umich.= edu/~thecat/

Dave = Morris
cell: 734-476-8769
http://www-personal.umich.= edu/~thecat/

--=A0
http://ai.eecs.umich.edu/= people/dreeves=A0 - = -=A0 search://"Daniel = Reeves"
"Try identifying the problem and = then solving it."
-- suggestion from Dilbert's = boss

Dave Morris
cell: 734-476-8769
http://www-personal.umich.= edu/~thecat/

Dave = Morris
cell: 734-476-8769
http://www-personal.umich.= edu/~thecat/

Dave = Morris

cell: 734-476-8769

http://www-personal.umich.= edu/~thecat/