On 8/30/07, Rob Felty < robfelty Æ gmail.com> wrote:

Firstly, I think Dave has some very good arguments here.

It also reminded me of a clarification question that I would like to ask:
Why is selling short good for society?
I understand how selling short works, and that one can make money off
it, but I don't understand how it is good for the company whose stock
is being sold short, nor how it benefits society. It seems to me that
betting on a company to fail is not the way to create wealth. There is
a good chance that I don't understand something about the concept of
selling short. Please enlighten me.

I have an additional 2 points to add here.

1. Tuesday on NPR I heard a story about the subprime mortgage fiasco
(which has been in the news almost everyday for a week or two), which
said that the ratings agencies were deliberately misleading investors
for personal profit, and that a very similar thing happened in the
dot.com bust. It seems that ratings agencies currently have something
to gain from telling people that they should keep investing, even when
things don't look so good. In the case of the dot.com bust,
independent rating agencies were established after the fact to prevent
this, and the commentator on NPR said that it is likely that the same
thing will happen with mortgages. In this case, it seems clear that
some people in the free market have something to gain for being
misleading. In other words, the free market fails in these cases.

2. I will remind the list of a post I made several months ago about
nationalized health care:
http://ai.eecs.umich.edu/people/dreeves/improvetheworld/archives/emails/488.php
The gist of this article is that a nationalized health care system
such as Canada's is cheaper and more effective than our current
system.

Rob
On 8/30/07, Dave Morris < thecat Æ umich.edu> wrote:
> Okay, so you've trivialized the response into a self defining cycle. You
> can't say that anything good that should happen increases wealth because
> we'll measure it in terms of wealth. It's begging the point, and in the real
> world it's not the way things work.
>
> In the same way I could say that decreasing the value of the company I spoke
> of (was ERIM, became Veridian, now is GD-AIS, a subset of General Dynamics),
> decreases wealth because you have to measure the decreased happiness of the
> employees decreased efficiency of their research and decreased synergy of
> their research group because so many of them left to go elsewhere. The stock
> market, which paid the CEO (Peter Banks) through the nose for doing so
> failed to correctly assign value for this process and gave away a ton of
> money because of it. Sure, it may correct itself in the long run, over 5-10
> years as GD stock goes down, but that's too late, the damage is done.
>
> You also cannot properly measure benefit to society by what people are
> willing and able to pay. I know it's the American way to ignore what's good
> for poor people and only focus on what's good for rich people, but the poor
> people in the DC area benefit quite a bit (increased social welfare) for
> having access to top quality museums and exhibits such as are there, and the
> rest of us rich people who have enough money to throw around benefit also
> because we live in a more educated society as a result. If you charged full
> cost for admission to cover the facilities, those people would stop going.
> The same thing is true of education at most levels. The people who can't
> afford it are the ones who need it the most. If you charged fair market
> value for elementary school, most kids wouldn't go, and it would destroy our
> society. In the long run obviously this increases wealth, but only over a
> very long term in a very difficult to measure way- which is why noone in our
> country is willing to pay as much as they should be for education. You can't
> show increased wealth resulting on a balance sheet, you can't easily prove
> how it's benefiting society. So people claim to be in favor of it but won't
> actually pay for it and it's suffering as a result- because we're too
> focused on only the creation of wealth. We're too dumb to figure it out.
> What a pretty cycle that is.
>
>
> With slavery, again, you're self defining yourself to be right. Now you're
> creating this new element of freedom- how is that not a subset of social
> welfare? How is that not a perfect example of how losing money is better
> than making money, if it's made the wrong way? If it hurts more people than
> it helps in the process. Clearly we agree there's good profit and bad
> profit. Good profit is where both people benefit and feel happier in the
> tradeoff made. Bad profit is where people don't realizing they're getting
> hurt as a consequence. Yet it happens all the time. Capitalism does not
> respect basic human rights. You and I do, and the socialist laws of our
> country do, to keep Capitalism in check. We have to continue to evolve such
> laws as capitalism evolves in order to keep pace and keep the appropriate
> balance. People are definitely continuing to optimize the capitalist
> component of our society, so we must continue to optimize the socialist
> component as well.     I suggest that perhaps we could identify ways in
> which the stock market enables and encourages bad profit and find ways to
> check that without removing it's capability of enabling and supporting good
> profit. I think the answer lies somewhere in the time scale of things, that
> you could probably conclude that most forms of good profit take a fair bit
> of time, while most forms of bad profit happen very quickly. There would be
> exceptions to both of course, and therefore costs, but perhaps a solution
> could be found where the aggregate good is significantly increased?
>
>
> The stock market shares the blame because of what it enables. No profit
> could have been made from the destruction of ERIM. Or much less. Or maybe
> not- that's part of why I bring this discussion to this group. Obviously I
> haven't found a way to modify the stock market to prevent this problem, and
> I challenge you to do so. Maybe this particular example was an example of
> something different, unrelated to the stock market really. I'm not sure.
>
>
> And an extreme version of what you're saying would be if it doesn't make
> money we shouldn't do it- like the mental hospital for the poor which got
> closed down because it wasn't profitable, to the point where the company
> running it threatened to arrest the doctors who were in there cleaning it up
> after the storms trying to re-open it, because if it was wrecked they had an
> excuse to not have to run it anymore. Because all they cared about was
> creation of wealth. I like to think we'd both agree that this was a bad
> thing. Fortunately we'll neither of us take our positions to the extreme and
> only judge them on that, but rather look for actual reasonable
> implementations in the real world.
>
> Aiming for not outlawing any consensual crime is a good goal, but overly
> simplistic. In reality for a functioning society you have to make one set of
> laws for everyone in the spheres in which they interact. This necessitates
> that you will have regulations which prevent some people from doing what
> they want to do in order to prevent other people from not having done to
> them what they don't want to have done to them.    As fun as it would be to
> eliminate all the speed limits and guard rails in the country, most people
> want them, so those of us that don't have to suffer through it.   Perhaps
> those who make their living studying and trading on the stock market might
> have to accept that they are not able to buy and sell to each other exactly
> how they want if it means that the majority of people who do so casually, or
> only with their retirement accounts or otherwise at levels of large
> distraction, can do so more safely and reliably. I don't know, that's not
> really the right analogy, but if I had the right solution I would have
> started this thread with it.
>
>
>
> I mean geez, why do you so much want the terrorists to win? ;-)
>
>
>
> On Aug 29, 2007, at 6:59 PM, Daniel Reeves wrote:
>
> I consider my challenge unanswered!  Read on...
>
>
> How about establishing the environmental protection agency?
>
> The value of saving a forest or preventing x tons of pollution can and must
> be valued in dollars.  Refusing to quantify it leads to more environmental
> damage.
>
> So the EPA, if done right (levying pollution taxes!), always increases
> wealth by incentivizing the right trade-offs.  [See also Kevin's response]
>
>
> All the national museums in downtown DC?
>
> If a museum can't cover its costs through donations and admissions (or
> admissions that people would have been willing to pay even if you choose not
> to actually charge admission) then is it good for society to have that
> museum?  Not at all clear.  If the answer is yes then where do you draw the
> line between what's worth it for the good of society and what isn't?
>
> But perhaps a museum that we expect future generations to have a lot of
> value for could be an example.  The real point of my challenge was to assert
> that wealth and welfare are the same thing (as far as public policy is
> concerned).  This museum example doesn't refute that but may be an example
> of when we should take a leap of faith and do something for the sake of
> future wealth that there is no way to measure yet.  But in fact, it's not so
> hard to measure.  How much do we currently value museums our ancestors
> maintained?
>
>
> Abolishing slavery?
>
> Ah, good one.  But this doesn't count because the principle of freedom
> trumps both wealth and welfare.  (Kevin's point was that abolishing slavery
> doesn't necessarily increase net welfare -- maybe the utility of the slave
> owners increased more than the slaves' utility decreased.)
> Slavery is just intrinsically immoral.  Let's stick to the universe of
> policies that respect basic human rights.
>
>
> The CEO who got rich destroying the non-profit research company was a snake
> oil salesman at every step of the way. [...] got rich while the illusion
> lasted, and now is in California on the beach and people here are looking
> for new jobs. [...] Encouraged supported and enabled by the way the stock
> market works.
>
> We agreed that swindling is stealing and should be illegal.  I still don't
> follow your argument that the stock market shares any blame.  I second
> Kevin's request for the name of this company.
>
> An extreme form of your position would seem to be "no selling things because
> sometimes it might be snake oil" or perhaps "no selling oils because they
> might be from snakes".  To restate my point from before: laws that limit the
> consensual behavior of individuals do more harm than good.
>
> Also, it's unamerican!
>
>
>
>
> On Aug 28, 2007, at 12:46 AM, Daniel Reeves wrote:
>
>
> I challenge you to name a public policy that increases net welfare (ie,
> utility) while decreasing total wealth.
> PS: The snake oil case is simple: no swindling -- it's the same as stealing.
>  I see no analogy with short-sighted stock trading or overcompensating CEOs.
>  Also, outlawing snake oil increases total wealth. (The snake oil
> salesperson gets richer by $50, the sucker gets poorer by $50, sucker gets 0
> benefit, both parties lose $5 of time: total wealth = 50 - 50 + 0 - 5 - 5 =
> -10.  If that 0 were more than 10 then wealth would have been created.)
> --- \/   FROM Dave Morris AT 07.08.27 14:54 (Today)   \/ ---
> I do agree that one should err on the side of less government and less
> regulation as a general rule, as a goal to be aimed for. But that shouldn't
> paralyze us from action if we don't have a perfect or perfectly known
> solution but we know we have real problems. No, the free market is not an
> engineered system. But it is one we can influence, and one that many are
> trying to influence all the time. The default is that people will try to
> influence our system to maximize their ability to profit, which is not
> always in line with maximizing social good. So we have many good regulations
> on capitalism in place and should continue to. Even though they hurt people
> sometimes, on the whole they're worth it.  We don't allow snake oil salesman
> to peddle their trade anymore (selling products claiming to have one effect
> and really having none), even though it's consensual and profitable. I think
> perhaps we should look at some stock deals and some CEOs that way as well,
> perhaps requiring more openness about who makes how much, etc., so that
> motivations are more clear when people take charge of companies and start
> changing them around.
> I'd agree with reducing the level of corporate welfare and protection, which
> starts with reducing the lobbying influence on our government. That would be
> great, and I'm far more confident in the value/safety of this action than
> any change to the stock market.
> But simultaneously, when a small number of people like those who took charge
> of the not-for-profit research company I spoke of, are able to for personal
> profit, manipulate the lives of a great number of people without their
> consent or control- that needs to be regulated.  To do this, like the war on
> drugs which I agree has problems, you need to take a multi-pronged approach
> to the sticky and difficult to resolve situation. Mostly you target
> prosecution of the actual crimes (theft, by drug users or CEOs), but also
> you increase awareness of the issue via education and email chains like this
> one, and also you try to reduce the motivation for the crimes to break the
> chain from the other side. (thus my proposal to look at the stock market and
> maybe place some controls there- I don't have a good war on drugs analogy
> here :-))
> Sure there are some companies that benefit from selling out. But I think
> there are also many that are hurt by it. We could argue without resolution
> for days because there are so many examples in both directions. But
> specifically with YouTube, I'd argue that college students would put
> together sites like that for free because they're sweet, without any
> motivation of profit. The open source software movement is great proof of
> this. And I'd further argue that while yes, venture capital and Google have
> provided the site with the resources to handle the load it currently has, I
> personally would guess that it would not be as good of a product if it had
> started off as a corporate profit driven venture. There would probably be
> registrations and more advertisements and more limitations to guarantee
> profits, and less just free functionality.
> There will never be a perfect solution. The balance between capitalism and
> socialism will always lead to individual cases where something is being over
> or under regulated. The real target is to reach a point where we have just
> as many problems pointing towards a need to go more capitalist as more
> socialist, and then we're at a pretty good point. So don't be too afraid of
> a solution that might slow down profit, slow down corporate growth, or slow
> down creation of wealth from time to time and in some cases. Those things
> are not the end of the world. Sure, creating wealth is good, and we should
> maximize that. But we should prioritize maximizing the creation of social
> welfare more.
> So I think it would be worth the risk to look into ways to tone down the
> stock market a bit.
> Dave
> On Aug 24, 2007, at 11:51 PM, Daniel Reeves wrote:
> You're thinking in terms of more government interference.  I think the
> answer is less.  Telling people how much they can pay each other or what
> they can buy from who when is dangerous territory.  Even if you don't have a
> philosophical problem with it (I kind of do) it simply tends to backfire.
> Getting rid of corporate welfare and legal privileges for corporations is a
> better place to start.
> And I just don't buy the point of your not-for-profit company example, Dave.
>  Not that I deny that something went awry in that instance.
> The prospect of getting bought out is what motivates many brilliant
> startups.  That's why we have flickr and youtube.  Certainly it motivated
> them to add the polish and scale to support millions of users.
> I feel there is a fallacy implicit in proposals along the lines of Dave's
> and Trixie's:  thinking of the economy as an engineered system to be tweaked
> (or in Trixie's case reengineered altogether).  Trying to conceptualize it
> that way leads to the dark side! :)
> Consider the fundamental difference between a law like "no stealing" and a
> law prohibiting/limiting consensual behavior, in Dave's case buying and
> selling stocks from each other or paying each other to run companies. Laws
> like that require a very careful argument. For example, "no buying drugs
> because you'll become an addict and turn to crime."  And of course even that
> turns out to be an incredibly bad idea.  Focusing our enforcement effort on
> actual crime (as opposed to behavior that may or may not cause indirect harm
> to society) would be far more effective.
> Dave, I do concede the meta argument about falsifiability.  Well said.
> --- \/   FROM Dave Morris AT 07.08.24 13:58 (Today)   \/ ---
> I guess disagreement with that would be my whole point. The CEOs benefit
> hugely, but the company is less effective than it was before at providing
> valuable research to society, and the individuals involved are less well off
> too, so how does society benefit by the company getting screwed? The example
> I speak of was a small research company that was doing its job very well as
> a not-for-profit entity, not a failing company or one that was getting left
> behind by the changing times. It was a valuable entity that no-one was
> getting rich off of, that one person saw the opportunity to get rich off of
> because of how the stock market works, and so they did so, without thought
> for long term benefit to the company or society. The stock market enabled
> this.
> In support of capitalist society, ways to regulate this such as controlling
> CEO salaries or stock deals could benefit long term shareholder value, and
> thus benefit society in the long run by optimizing value/wealth creation
> over time. (the ideas created by this company ended up being used by
> government programs, DoD, and others, so the value was getting out to
> society when it was being created, even if no one individual was getting
> rich because of it)
> Extended point- the maximization of profit and shareholder value is not
> synonymous with the maximization of benefit to society, and in fact is often
> quiet opposite. But I guess we'd be doomed in coming to any useful
> conclusions if I expand this thread into that other conversation as well.
> :-)
> I don't have a solution- I haven't come up with specific suggestions that
> would improve the stock market really, and I'd readily acknowledge that our
> system works better than any that anyone else is using at the moment. I just
> see a potential for improvement to occur.  Figuring out how to do it is the
> whole point of this list, yes? :-)
> Dave
> On Aug 23, 2007, at 12:16 PM, Kevin Lochner wrote:
> but you're forgetting my point, which was that even if some companies are
> getting "screwed over", said screwing may benefit society on the whole.
> --
> http://ai.eecs.umich.edu/people/dreeves  - -
> search://"Daniel Reeves"
> "As far as I know, this computer has never had an undetected error."
>
> Dave Morris
> cell: 734-476-8769
> http://www-personal.umich.edu/~thecat/
>
>
>
>
> --
> http://ai.eecs.umich.edu/people/dreeves  - -
> search://"Daniel Reeves"
>
> Absurdity, n.:
>         A statement or belief manifestly inconsistent with one's own
> opinion.
>                 -- Ambrose Bierce, "The Devil's Dictionary"
>
>
>
>
>
> Dave Morris
> cell: 734-476-8769
> http://www-personal.umich.edu/~thecat/
>
>