As daniel has pointed out, the market is not perfect.  A tempting 
conclusion to draw from that observation is "ok, let's fix it".  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.  This doesn't necessarily preclude a "fix" to markets, but 
it indicates that getting to a "better" outcome is possibly harder than we 
imagine.  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.  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.  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.	Examples of 
regulation gone awry include our disaster of a tax code and the
criminalization of drug use.  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.  Naturally, he's the only one who knows this.  The 
>> problem with the reasoning below is the implicit assumption that the CEO 
>> will not play the stock market.  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.  That would be the theory. 
>> In reality, something seems to prevent a CEO from doing just that (at least 
>> conspicuously).  One would be the laws against insider trading. Another 
>> would be that he is in effect giving evidence to his own wrongdoing.  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.  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.  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?   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.   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.  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?  The market is smarter than we think.
>>>> Nor do I have a beef with day traders.  Either they're providing valuable 
>>>> information to the market or they're going to get smacked hard.  (In 
>>>> expectation at least.)  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).	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.  The stock price estimates (the 
>>>> per-share net present value of) the cumulative future cash flow of the 
>>>> company.  The stock market estimates that better than any other known 
>>>> mechanism.  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.  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).  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.  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-high-gas-p...
>>>> and add to the list that cars are dangerous to cyclists and skaters!
>>>> --- \/   FROM Dave Morris AT 07.08.20 15:21 (Yesterday)   \/ ---
>>>>> 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. :-)
>>>>> Dave
>>>>> 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.  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.  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.   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.	  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:  Graham is so right!  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'?").  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 = stuff you want,
>>>>>>>> money = 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.  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.  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
>>>>>>>> -- 
>>>>>>>> http://ai.eecs.umich.edu/people/dreeves  - -  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/
>>>> -- 
>>>> http://ai.eecs.umich.edu/people/dreeves  - -  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/
>
>