Why Insider Trading is Unavoidable

The insider trader acts on his special knowledge of the new likely price of stocks. Should he be morally or legally compelled to communicate what he knows to prospective buyers or sellers? No. It would not be possible.

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One of Nassim Taleb’s key concepts is “skin in the game:” having something concrete to lose should things go wrong. A general who leads his army from the front has skin in the game, as did the invaders of Spain who burned their ships, putting the sea at their backs and making retreat impossible. Socrates and Jesus had skin in the game. Skin in the game means exposing oneself to the downside of being wrong. Talking heads on the news have no skin in the game, nor do academics, nor do commission-driven stock brokers who have only upside.

One of the few references to insider trading that Taleb makes is simply the dictum to pay more attention to actions than words – always good advice. The claim that those defending insider trading make is that insider trading “informs the markets” of facts relevant to the value of stocks. It is not about the “true” value of the stocks, since the price of anything is determined by supply and demand. But they are facts that will probably affect the price nevertheless.

The insider trader knows that shares in a company will most probably go up in price, or down in price, once certain facts about a company become widely known. Now, one seemingly moral thing he could do is to try to communicate this fact verbally. He could call up the Wall Street Journal, or some other publication more directly trade related, and say “this stock is currently undervalued, or overvalued.” The difficulty? This would resemble a classic attempt to manipulate stock prices. He could be lying.  Prior to his announcement, the putative insider trader could buy the stock, or short the stock (bet against it), while simply pretending to have special insider knowledge. The only way to communicate to the rest of the market the insider trader’s real perception of the likely future value of the stock is to actually buy or sell the stock – to put his money where his mouth is – to put his skin in the game. Up until then, other traders have no reason to take him seriously, and the insider trader could be making his various statements for self-serving reasons. It is the difference between a cad saying sweet nothings to achieve his goals, and actually marrying someone without a prenuptial agreement.

Hypothetically, a CEO could claim that share prices should go down, and then buy them up at a discounted price when shareholders took him at his word. Or, do the opposite.

Hayek wrote about the intelligence of markets governed by supply and demand. One of the problems of command economies is how to price things. Nobody at all knows what the appropriate or “real” price of anything should be. The only way to find out for real, rather than simply hypothetically, is to put something up for sale and to see what happens. This is truly useful information and no economic savant or governing tyrant can supplant the wisdom of markets. If the government starts to manipulate the price of things, then the “real” value of things becomes unknown. Government interference in the mortgage market through Fannie Mae and Freddie Mac – mortgages that were not officially backed by the US government, but unofficially were government guaranteed, as eventually proven by the “too big to fail” bail outs – contributed enormously to the 2008 housing market collapse as firms exploited this fact to make bundles of mortgages look better than they really were. Insider trading is the only way for the stock market to take advantage of the wisdom of markets.

If it were somehow possible for an insider trader to communicate the real expected changes in the value of a stock in some utterly convincing manner, such that everyone believed him to be sincere and honest, then insider trading would fail Kant’s test of whether an action could be universalized. If an insider trader could prove that his reckoning of the future value of a stock was accurate, then when he tried to put his money where his mouth was, it would not be possible. Were he to try to buy, no one would sell, and if he tried to sell, no one would buy, and the new information would not get transmitted to the market. The price of the stock would not follow the insider trader’s estimates. But, this perfectly believable communication cannot be done.

Merely verbally informing the markets is not possible. It is necessary for the insider trader to actually buy or sell stock for the “real” value of the stock to become common knowledge. In the real world case, no one would believe the “all talk” insider trader. And in the strictly hypothetical instance where perfect honesty could be proven, the stock prices would not follow the insider trader’s predicted path anyway.

There is something repellent about selling a stock that you are almost sure is overpriced to an unsuspecting buyer. It seems analogous to selling a car when one knows it has become a lemon. However, actions speak louder than words in this context and the verbal communication of likely stock prices will not work. The dubious seeming transaction is necessary for the whole market to be informed.

46 thoughts on “Why Insider Trading is Unavoidable

  1. Amen to your argument, and also to your concluding paragraph. There is indeed something repellent about selling a stock for more than you yourself think it is worth. But when you get right down to it, *all* trades proceed on that basis: the seller thinks the good worth less to him than what he can get in return for it from buyers, and the buyers think it worth more than they have to pay. Were it otherwise, at least one of the parties would not be motivated to trade, because he would judge that the trade would leave him at the very least no better off than if he had refrained. Trade itself imposes costs. Why bother, if there is no benefit?

    There is a market for news that might move prices. Unfortunately, the news is polluted with noise, to a degree that is not ascertainable, but which is certainly massive. Noisy news harms. It is tortious in fact; it ought to be tortious in law.

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  3. To Prof. Cocks and Kristor:

    What is the moral distinction then between selling a stock I know is overvalued because of information I am privy to and selling a car I know has a bad water pump to an unsuspecting buyer? The latter would be immoral, no? Why not the former then?

    But when you get right down to it, *all* trades proceed on that basis: the seller thinks the good worth less to him than what he can get in return for it from buyers, and the buyers think it worth more than they have to pay.

    I don’t see how this is relevant, though. This would still be true even if both buyer and seller had the exact same information about the good being bought and sold.

    • Hi, Ian: the difference between stocks and individual cars, is that if I lie about a car, and say it has a broken water pump to a buyer, there is no way I can benefit from this deception (barring some fantastic scenario). But, if I lie about the worth of a stock in a similar manner, and get enough people to believe me, I can short the stock and make a profit that way. Or I can talk up the stock, and make my profit that way. Either way, buyers of stock have reason to distrust my words, so warning buyers is mere talk, and talk cannot be trusted. Actions speak louder than words, as I wrote. Only by monitoring my actions can buyers be sure of my intentions.

      If the rule was that I am not allowed to sell a stock that I know will most likely go down in price, then the wisdom of markets cannot come into play, and the legitimate price of a stock cannot be communicated.

      • Hi Prof. Cocks,

        Ok, so the difference is that with my car, it’s hard to see how I could make money off it by saying that it is worth less than it actually is. Whereas with a stock, it is straightforward to make money in this way (i.e., by shorting).

        Ok, I can grant that this is a difference. But is it sufficient to amount to a moral difference?

        If the rule was that I am not allowed to sell a stock that I know will most likely go down in price, then the wisdom of markets cannot come into play, and the legitimate price of a stock cannot be communicated.

        But I don’t think that’s the rule re: the prohibition against insider trading. In general, you are surely allowed to sell stock when you know it will most likely go down in price; rather, you are not allowed to sell when the reason you know it will most likely go down in price is because of information that is not publicly available.

      • Ian: Noah traded on information that was not publicly available – so did Jesus; that’s how he fooled Lucifer into sacrificing him. Someone always does. Someone must.

        Richard: Indeed. Caveat emptor could be paraphrased as caveat cognor.

  4. The market ‘value’ merely reflects what people happen to want, their subjective values. But this does not have any necessary connection to a thing’s true objective value, so I don’t in principle see the problem with the government regulating the market to discourage, say, rampant consumerism. Free market principles reflect liberalism as applied to the economic sphere: the efficient satisfaction of whatever subjective consumer desires people happen to have. It purports to be neutral toward the various consumer goods and lets the market, i.e., the aggregate of individual desires, determine ‘value’.

    • Thanks, Ian. I personally don’t have any interest in the government regulating something like rampant consumerism. My rule of thumb is to use a college administration as a imaginative proxy for government. Every programmatic regulation the administration comes up with makes things worse, and everyone subjected to their provisions know that they are worse. Time that could have been spent on something productive is wasted keeping some SOB happy who has nothing else to do than make other people miserable and get massively overpaid in the process, frequently with Catch-22s built into the system. Bureaucrats are interfering busybodies and nothing more. The fewer there are the better. What is particularly galling is their need to come up with new inanities, and insanities, in order to justify their existence and paycheck.

      Once a system; a charity, a government department, exists, 90% of the money associated with them and time and effort are spent keeping the system going. That’s why businesses, that are systems too, are considered wildly successful if they make a 10% profit.

      With regard to “value,” I did my best to point out that it is largely a matter of supply and demand and thus includes subjective factors, and to take that into account. Nonetheless, a car with a known problem is generally worth less than one without it.

      • Yes, I acknowledge that in your post you were clear that value did not necessarily refer to a thing’s objective value. And I agree that there will be some connection between a thing’s subjective value and its objective value. Nonetheless, I disagree with the ideological underpinnings of free market economic theory, whereby in principle the price should just reflect whatever people want: if people will pay more for a Beyonce concert than for a Beethoven symphony, then so much the worse for Beethoven symphonies.

        The economic sphere ought to be subordinate to the common good rather than an autonomous sphere independent of other non-economic concerns a society might have. For example, I would have no problem in principle with governments restricting fast food chains in order to preserve local culture and encourage families actually taking time to eat dinner together, with governments restricting social media use, smart phone usage, and other technologies that drive increased atomization and deracination, with governments implementing protectionist policies to protect domestic industries and jobs, with governments incentivizing businesses to pay married fathers more than single men or women, etc. (I am speaking in principle: I do not expect that our government would implement sensible policies because it is not oriented to the true common good but rather to radical personal autonomy.)

        Certainly, there are all sorts of problems with bureaucracy, and modern bureaucracies are mostly a force for evil. But some level of administration is unavoidable.

      • I do not expect that *our* government would implement sensible policies because it is not oriented to the true common good …

        That’s the nature of all human systems under the orbit of the moon. Things seek their own interests. That is one justification for the Catholic social doctrine of subsidiarity, under which governments delegate downward in the social hierarchy every decision that they can. The end result is that most decisions get delegated – properly – down to the individuals whom they primarily affect, resulting in a pretty free market for goods and services, mediated by particular decisions of individuals about what is best for them, mutatis mutandis; the alternative being some degree of tyrannical, less informed and so more erroneous coercion over their moral lives from on high.

        Certainly, there are all sorts of problems with bureaucracy, and modern bureaucracies are mostly a force for evil. But some level of administration is unavoidable.

        Yes. Administration per se is a niche for evil. It should be minimized, in favor of direct encounters between agents. That means minimizing administrative interference in all such encounters.

        There is an ineradicable de minimis amount of administration that comes along with sovereignty and social order as a package deal. It should be minimized. That’s just good system design: good for the subjects, therefore good for the sovereign, and for the public weal.

    • Ian, the objectively true value of a good – its absolute value – is known, and knowable, only to Omniscience. We must hobble by on less; on our subjective, partial evaluations of goods. There is no reason to think that some distant bureaucrat – who is just as epistemologically and morally challenged as you – knows better than you do about the true value of x to you. Indeed, there are manifold reasons to believe that he knows worse than you do. For one thing, he cannot in the nature of the case be familiar with your predicaments, and thus with the relative values of things to you. Multiply that epistemological deficit across all the people in the economy. What you end up with is a bureaucrat – or a bureau full of them – making decisions about economic values of this or that good that have *nothing to do* with their real value. And that ends up impoverishing everyone.

      We know less than Omniscience; but bureaucracies know less than we. There is no way around this.

  5. I have found this a rather strange exchange from people I assume to be traditionalist Roman Catholics. Surely insider trading would be regarded as abhorrent to the likes of GK Chesterton? I suspect that his attitude would have been that when The System has deteriorated to the extent that insider trading seems not just rational but A Good Thing, then The System has become evil.

    …Which, on many other grounds, is very obviously the case. Which is probably why a rational argument that ends-up approving insider trading smacks so strongly of casuistry (in a bad sense).

    A Christian nowadays cannot live ‘cleanly’ – especially in the staggeringly-evil world of finance – which, along with the mass media, has done more to destroy Good than any other realm of human activity over recent decades; and a Christian should be honest enough to admit the fact and repent it.

    I’m not saying that Christians should quit evil work and find good work, because there isn’t really any such thing as good work – that being a measure the depth and extent of the world’s corruption. Everybody works for Evil Inc. in one of its branches.

    In that sense we are in the position of the many millions of Christian slaves throughout history – compelled to do evil (as the slave-master bids) or else die. Yet it is possible to be a Christian slave (as the New Testament seems to make clear). The Christian slave may be compelled to sin; but he knows sin for what it is, and he repents and is saved.

    The power of repentance is unlimited – but one must repent to avail oneself of it.

    • Thanks, Bruce. Clearly, I have struggled with the topic. I have no horse in this race, really. Are you able to clarify where you think I am going wrong? I am searching for reasons in good faith, and I am not entirely sure that I am not in error.

    • The question is whether insider trading is in fact an evil. I don’t think it is. *Someone or other* is going to be first to trade on a novel bit of information. Why should it *not* be an insider?

      In point of legal fact, it is the legal arguments for the criminalization of insider trading, and the legal definitions of who qualifies as an insider, that are a font of absurd casuistry.

      We should just admit that different people know different things, think differently – some better, some worse – and trade differently. There is *no way around these plain facts.* It is utopian foolishness to suppose we can force reality to be otherwise. So, admitting these truths – which, NB, are not *defects* of the created order, but rather *features* thereof – we should let them run. Let each man invest the goods at his disposal as he sees fit, and reap the consequences (Matthew 25:14-30). Some will then do better than others. That, too, is ineradicable, as God has told us (Matthew 26:11). Because why? *Because man is fallen,* and so *doomed to err,* in greater or lesser degree. Let us then succor the poor, to be sure; but, let us not try to prevent poverty, or the foolish misguided decisions that lead thereto. On freedom of fallen creatures, that *cannot be done.* That being the case, the attempt to do it is itself a great evil.

  6. @Richard – I suppose I feel it is like many moral issues where it is so obviously wrong that it should not be needed to explain just exactly why it is wrong.

    And because it is so obviously wrong, then we find that we cannot adequately *explain* just why it is wrong.

    And we end up, by the feebleness of our explanation, causing ourselves to doubt its wrongness.

    And a moral evil incrementally becomes a mere subject for ‘debate’ – which always (by the nature of debate) devolves to wrangling over evidence and logical procedure, and is therefore inconclusive.

    And so (in effect) Established power wins by default, might remains ‘right’.

    This is the same subversive sequence we have seen so often, so systematically, deployed by the left over the past decades in so many areas of morality, aesthetics and with respect to truth.

    • It is obviously wrong to defraud a counterparty. But it is obviously not wrong to sell at the market – especially into a market composed almost entirely of counterparties who are *at least* as informed as the seller about the state of the market – albeit about different aspects thereof than he himself knows about. Indeed, to sell at anything other than the market price *just is* to introduce noise into the market. It is in effect to propose an argument that a good is worth other than what the market thinks it is worth. And after all, insiders are as prone to error in their assessments of the likely outcomes of present circumstances as anyone else.

      Let traders trade, at whatever prices they think right. Let news spread, and let the market sort out the noisy bits of it from the true bits. The faster all that happens, the less evil is done.

      The really massive evils are enabled when markets are somehow prevented from learning early on about this or that new item of news (the apotheosis of this sort of evil is the prevention of failure of businesses that are “too big to fail”). And insider trading laws impose exactly that sort of prevention. They prevent the learning of the market, and encourage misallocation of economic resources.

  7. The problem should be obvious. That is, poor documentation – user manuals not clearly expressing the letter of the law that end up as office credenza-ware through disuse.

    We have to go back to reinforcing the basics when the spirit of the law fails.

    A new law is needed legislating insider trading morality with simple language to eliminate ambiguity and the requirement for future interpretation.

    Who is better skilled at morality legislation documentation production than Congress? No one. Churning out large printed volumes is their reason for being. The seeming priority given to large page counts does sometimes result in members having to read the Bills AFTER they vote/sign them, … to know what’s in them. But we trust they do this in good faith on our behalf.

    Congress also possesses high dramatic play acting persuasion skill to publicly perform the outrage expression spectacle justifying the new need to the Coliseum audience.

    The Congressional style of servant leadership by example will most assuredly convert other potential wrong-doers and make them want to willingly follow the right path.

    For efficiency, Congress can repurpose/rebrand the 2012 Stock Act that forbids Congressional insider trading.

    Oh wait. Congress has a loophole for non-compliance around that one too.

    Never mind.

    https://www.cnn.com/2020/12/16/investing/congress-stock-trading-ethics-perdue/index.html

    https://senatestockwatcher.com/

  8. @Kristor – “The Market” eh?

    This age is one in which Christians absolutely need to wake up to the (“Ahrimanic”) evils of abstraction and system – including in your case the market, and in my case natural selection – all of which come under the category of complex Systems Theory.

    I spent the early and mid 2000s going deeper and deeper into this, before coming to a kind of reductio ad absurdum of recognition at the extreme immorality and good-destructiveness of what I was professing.

    Being a vigorously-publishing academic I left a detailed record of my explorations; which should serve as a warning of where this kind of thinking leads, if pursued with rigor and determination.

    https://www.hedweb.com/bgcharlton/ – see The Modernization Imperative book, especially the Appendix on Systems Theory, and the section on Systems Theory and Modernization

    For me, the road of excess led, eventually, to the palace of wisdom: i.e. Christianity. But Christianity is also, from way back, infected deeply with systems abstractions. This did not used to matter, and some systems (eg. some churches in some times and places) were net-Good – but it Now matters fatally because all systems are become one (the churches have been absorbed, very-nearly completely as of 2021); and that single-system is headed by Satan and staffed by his servants.

    I don’t think Christians have any alternative but incrementally to purge ourselves of systems thinking – of putting abstractions as primary – which leads to actual individual living and thinking Men, living ‘for’ the sake of (i.e. for the ‘benefit’ of) conceptual abstractions such as markets or evolution (or equality, freedom, justice) or statistical abstractions.

    This is, of course, a radically unworldly way of thinking and behaving – yet in 2021 it is increasingly the case that to be worldly is actively to be allied with Satan.

    And, after all, The System is trying to destroy itself – by multiple simultaneous strategies. It would be (it is) absurd to find Christians working to sustain a machine of Global damnation, against the wrecking efforts of demons.

    (Evil is always at war with itself, as well as at war with God. Taking sides with one or another demonic faction seems like a mug’s game, likely to end in joining one or another of the factions.)

    The path ahead is a looping back to the spontaneous, natural, *personal* way of thinking of which we read in much of scripture, especially the fourth Gospel – in which reality is seen in terms of living, conscious beings in relationships. The fact that this seems childish and primitive is the only thing that keeps us from the truth.

    • I’m not Zippy. I’m not trained like he was trained, with an intimate practical understanding of business dealings. But after seeing him at work and dwelling with his writing, it has generally struck me that trying to think, “How would Zippy deal with this question?” works as a pretty good touchstone.

      I think what you’ve said above is a pretty strong contender. The important aspect is personal conduct. Don’t be baffled by the abstractions. Instead focus on being honest in your dealings with others, whether those dealings involve stock (which is a real object with real consequences just as if you were trading directly in, say, bushels of wheat) or anything else.

      “Insider trading” is immoral in exactly the same way as gingering a horse is.

      • @Rhetocrates – This implies that only people who have no insider knowledge should trade – the blind leading the blind. As Kristor writes, the first person to learn the information (whether media, politician, etc) becomes the inside trader, and widely advertising the “real” worth of stocks can be gamed in both directions.

      • I think your idea of insider or insider trading is confused. I’ll delineate a few examples, including areas of trouble, though again, I am no hand with financial markets or even business administration, so these are as much for my own elucidation as anyone else’s.

        First, a baseline guiding idea: trading based on information that anyone could gain upon sufficient inspection is fine. Trading based on influencing the value through privileged actions is not fine. With that in mind…

        Is a private person trading based on listening to financial media licit? yes
        Is a private person trading based on an analysis of SEC filings or similar licit? yes
        Is a public official trading based on information only available to him due to being a public official licit? no
        Is a corporate officer or employee trading based on information gained from being a portion of that company licit? maybe, depending on the nature of the information and the nature of the trade

      • Let’s consult STA, as Zippy would have done:

        The defect in a thing makes it of less value now than it seems to be: but [perhaps the seller expects the goods sold] to be of less value at a future time, on account of the arrival of [expected future events], which [were] not foreseen by the buyers. Wherefore the seller, since he sells his goods at the price actually offered him, does not seem to act contrary to justice through not stating what [he knows or believes] is going to happen. If however he were to do so, or if he lowered his price, it would be exceedingly virtuous on his part: although he does not seem to be bound to do this as a debt of justice.

        Summa Theologica, II‐II, q. 77, a. 3

        The example STA uses in his reply to Objection 4 is of what we nowadays call profiteering, or arbitrage: buying something cheap in one market locus and selling dear in another. The man first on the scene with plywood when a hurricane looms is not obliged to sell it at the price he paid for it, but can sell it justly at the vastly increased price that the massive demand in the path of the hurricane has generated, even if he knows that plentiful supplies of plywood are about to arrive via other merchants.

        The analysis applies with equal pertinence to insider trading.

    • Bruce, while I share your horror at the profound and comprehensive corruption of our institutions, your assessment that they are all now in this Kali Yuga totally depraved seems to me too bleak. If that is true, then society per se is wholly wicked. That sounds like a sort of Gnosticism. It is in fact anti-Christian; for, Christianity thinks worldly things – including worldly institutions such as the family, the Church, the state, and so forth – basically good, albeit imperfectly so.

      The path ahead is a looping back to the spontaneous, natural, *personal* way of thinking of which we read in much of scripture, especially the fourth Gospel – in which reality is seen in terms of living, conscious beings in relationships.

      “The market” is just shorthand for a congeries of living, conscious beings communicating with each other about the state of things so as together to ascertain the truth about it, and negotiating with each other about what seems to them to be fair agreements for the exchange of goods and services. “The economy” includes the market, and also the labor and resources involved in the production, investment and exchange of those goods and services: it is living conscious beings making decisions together, and coordinating their work. It is therefore a category error to think that the market or the economy are themselves wicked agents. They are not agents, but media for the exchange of information among living, conscious beings. If they mediate evil, they mediate the evil of those living conscious beings.

      The market and the economy are more like language or the cosmos than they are like a state or a bank. States and banks can act in their own interests, as distinct from the interests of their constituent living, conscious beings. They can be entities in their own right, and thus agents. Not so for markets or the economy.

  9. Kristor,

    Noah traded on information that was not publicly available – so did Jesus; that’s how he fooled Lucifer into sacrificing him. Someone always does. Someone must.

    Why must a trade of necessity involve a disparity in information between the two parties? You and I can have exactly the same information about the car I want to sell you. How does this preclude the sale from going through?

    At any rate, noting that in the real world people will have varying levels of information regarding the products they buy and sell and then concluding from that that therefore, we ought to allow insider trading, seems to me to be eliding a crucial distinction between information that is in principle publicly available even if not actually possessed by everyone and the nature of information that insiders are privy to.

    Satan declared war on God. It’s hard for me to see how acts of war – where deception (though not lying) can be legitimate – are in the same genus as trading with honest men.

    ***

    In response to me writing that I don’t trust our government to implement sensible polices because our government is not oriented to the common good, you wrote: “That’s the nature of all human systems under the orbit of the moon. Things seek their own interests.”

    Ok sure, but to leave it at that is incomplete. The polis by its nature is oriented toward the common good. Of course because of our fallen natures, states only ever realize this goal imperfectly. Even our own polity, however, despite having been taken over by the forces of Satan, still pursues the common good to some degree (typically in ways we take for granted).

    It is true that a man who is a father will seek his own interest. Nonetheless, most fathers still seek the good of their families, and most will sacrifice their own interests for the greater good of their family. Even many bad fathers do to some degree. So sure, a father will allow a certain degree of autonomy to his wife and children in making decisions, but I don’t see how this implies he ought to “delegate downward every decision he can”. The alternative is hardly “some degree of tyrannical, less informed and so more erroneous coercion over their moral lives from on high.” The same goes for rulers with respect to their realms.

    There is no reason to think that some distant bureaucrat – who is just as epistemologically and morally challenged as you – knows better than you do about the true value of x to you. Indeed, there are manifold reasons to believe that he knows worse than you do. For one thing, he cannot in the nature of the case be familiar with your predicaments, and thus with the relative values of things to you.

    Yes, qua individual, there is no reason to believe the distant bureaucrat is in a position to know better than I how I ought to act. But qua instrument of the sovereign executing his will, he may indeed be in a better position to ‘know’ better than I what promotes the common good.

    As a subject or citizen, my perspective with respect to the common good is necessarily limited compared to that of the ruler because I do not have the same relationship to the common good as he. I cannot see the ‘big picture’, so to speak. So while it would make little sense for bureaucrats to tell housewives how to fold their laundry, it might make sense for bureaucrats to ration fuel consumption in the event of war or an energy crisis: something an individual would hardly be in a position about which to make the best judgement.

    One sees the same dynamic in corporations: on the one hand, managers can micromanage their subordinates to the detriment of their company’s performance: it hardly makes sense to tell a subordinate more competent than you how to perform a task within his competence. On the other hand, because of their wider scope of responsibility, managers have a better view of the big picture and so can guide and direct their subordinates in ways that benefit the company, but which may make little sense to their subordinates.

    • Ian, if you haven’t yet done so, you may be interested in reading Yves Simon’s A General Theory of Authority. Simon reflects on how people relate to the common good in their various social roles. For example, he has an interesting take on NIMBYism. Your comment reminded me of the book.

    • Why must a trade of necessity involve a disparity in information between the two parties? You and I can have exactly the same information about the car I want to sell you. How does this preclude the sale from going through?

      Even if we both knew everything there is to know about the car – which is an impossibility, NB – we could not know everything there is to know about each other’s preferences. The only way your counterparty could know everything about your preferences that you do would be for him to feel them in just the way that you do. But that feeling would mean that his preferences were the *same* as yours. And that schedule of preferences for all possible goods, including the car, would disincline him to sell just as much as it inclined you to buy.

      [It seems to me that you are] eliding a crucial distinction between information that is in principle publicly available even if not actually possessed by everyone and the nature of information that insiders are privy to.

      A lawyer at FTC knows that he is going to file an antitrust suit against IBM, because he alone just made the executive decision to do so. He is an insider. The moment they learn of his decision, all his colleagues in the antitrust division are insiders, too. He phones up the General Counsel of IBM and lets him know about the looming suit. The GC and the rest of the IBM C suite become insiders. The GC calls the outside counsel for IBM and discusses the suit. The outside counsel – the entire firm, all the personnel thereof – become insiders. One of them tells his nephew about the suit; the nephew tells his barber; the barber tells his customer the reporter for the WSJ. The reporter writes up the story and submits it to his editor, who approves it and sends it on down to the composition department so it can be set up for publication. All these people, and everyone among their families and friends, are insiders. Hundreds of people know about the suit by now, but nothing has yet been published about it in the press. Is the information of the impending lawsuit public? Of course it is. It has been transmitted from the cortex of the regulator to that of another; it is public.

      Satan declared war on God. It’s hard for me to see how acts of war – where deception (though not lying) can be legitimate – are in the same genus as trading with honest men.

      Noah traded with other men of his town – not with Satan – for supplies to build and fit out the Ark, because he had inside information about the Flood. If he had first told his counterparties about the impending Flood, the prices of those supplies would have been through the roof, because everyone would have been trying to build Arks. The only reason Noah was able to save life on Earth is that he kept his knowledge of the Flood to himself. He doomed all the people of his own town. *He had to.* Had he done otherwise, there would for want of adequate supplies have been no Arks at all, and life on Earth would have ended.

      What is more, YHWH had already told Satan that Jesus would destroy him, way back at Genesis 3:15. And Satan had opportunity to reckon that Jesus is YHWH. The information that Jesus is YHWH was public; not to mention all the prophecies, Jesus himself had been quite forthright about it – which is why the Sanhedrin had really no choice but to kill him, *so far as they could see* (i.e., not far enough to see that he spoke the truth, so that they *should not* kill him). They could not see that Jesus was speaking the truth, because their wits were addled. So likewise with Satan. His wits were addled by his rebellion against Truth. He did know that Jesus was YHWH – this is revealed by the nature of his temptations of Jesus in the Wilderness – but he thought that he could frustrate the Plan of Salvation by killing Jesus. Truly nuts. He traded on the irrational exuberance of overweening pride, and upon greed; always bad policy. A more prudent trader would have gauged the likelihood of his success against YHWH at zero, and would have bowed out of the drama early on. The Crucifixion was an unforced error, an own goal, on the part of the Enemy.

      The polis by its nature is oriented toward the common good. Of course because of our fallen natures, states only ever realize this goal imperfectly.

      Yes. The Principal Agent Problem is incorrigible, for Fallen men. This is the moral (as distinct from the practical and economic) reason for the justice of the doctrine of subsidiarity. The more decisions that are made by agents – such as bureaucrats or sovereigns – the greater the prevalent moral hazard, and so the greater error; and vice versa.

      The doctrine of subsidiarity does not suggest that *all* decisions ought to be devolved down to the bottom of the social hierarchy, but rather only those decisions that are more apt to lower levels. Rationing is an apt example. It is a type of the central economic planning of production that the USSR engaged in so thoroughly, and so disastrously. Rationing is inefficient, because it metes out fuel equally to every usage, regardless how relatively important such usages might be, while preventing the signals to consumers and producers that would otherwise be mediated by market transactions (of consumers and producers *with each other*). If the sovereign decides on the basis of his better acquaintance with the bigger picture that in view of a general threat something should be done to increase stores of fuel, or to limit its consumption only to the most important uses, his best options are either to buy a store of such fuel, thus increasing both the reserves of the polis and the current price of fuel (and at the same time disbursing wealth from the sovereign fisc into the economy of the polis at large), or to tax sales of fuel so as to increase its effective price. The former is the more economically rational and efficient option. It is what the US has done with its Strategic Petroleum Reserve.

      When the price of fuel then rises because the sovereign is restocking the Reserve and so increasing demand for it, consumers can decide for themselves, dynamically, and without any costly frictional administrative interference from on high, which of its uses are the most important. Their mutual negotiations will have the effect of integrating all their knowledge into the signals mediated by the price system, thus shunting a scarce resource to what they think are its best uses (allowing of course for the friction, error, noise, and so forth that are inherent in human communication, under any arrangement whatever – that are systemic). Likewise, rising prices of fuel will motivate producers to supply more of it, again with beneficent knock on effects for the security and prosperity of the whole polis.

      The adaptation of the market – which is to say, of people (for, the market is just people coming to what they themselves deem to be mutually beneficial agreements) – is fairly instantaneous. Rationing prevents it, by constraining the agency of such adaptations to the minds of bureaucrats, none of whom, nor indeed all of whom, can possibly know as much about the whole situation as the whole population knows.

  10. Indeed, to sell at anything other than the market price *just is* to introduce noise into the market. It is in effect to propose an argument that a good is worth other than what the market thinks it is worth.

    But why believe that the market has accurately assessed the true worth of a good? I don’t see the problem with arguing that a good is worth other than what the market things it is worth.

    ***

    Thought experiment: suppose I own 50k worth of stock in the company I work for. To outsiders, the company seems to be doing very well, but I know that the product my company has been marketing and is about to release has some serious problems with it. Having a high degree of certainty that the stock price will plummet, I decide to sell my 50k of company stock to my friend Kristor. Six months later, the new product bombs and the price of the stock I sold to Kristor falls to 25k.

    Have I done my friend Kristor wrong? Has he a right to be angry with me?

    It seems to me that the answer to both questions would be ‘yes’.

    To me, insider trading seems to gain whatever legitimacy it has in the minds of its advocates from the fact that the buyers and sellers are mostly anonymous, so it is harder to see that you might be harming an actual person when you sell stock you know to be worthless. Similar to how it is easier for people to rationalize say, the Hiroshima and Nagasaki bombings, compared instead to a hypothetical alternative where we had gone in to those cities and shot every man, woman, and child point blank. More anonymity in the former.

    • What even is a ‘market price’? How is it different from ‘a price agreed between two parties’, and does it exist?

      Aside, it should be obvious (I hope it is obvious) that ‘a price agreed upon between two parties’ is not necessarily synonymous with ‘a just price’

      • The market price is just the price at which the latest transaction in a good on a particular market executed. It might have been a transaction involving either individuals or institutions. In securities markets there is almost always an institution involved on at least one side of each transaction.

        And yes, the just price is not the market price, because the market price is set by epistemologically challenged traders. Only God knows the just price.

    • … why believe that the market has accurately assessed the true worth of a good? I don’t see the problem with arguing that a good is worth other than what the market thinks it is worth.

      Only God knows the true worth of things. Markets do not accurately assess it. Rather, they asymptotically approach the price that takes into account all the information known to all the traders in the market. That data set *cannot* be complete, because each man and all men together are but partially scient. Thus, the market price is a pretty accurate approximation to what all men know and believe, and not to the truth.

      Have I done my friend Kristor wrong? Has he a right to be angry with me?

      My duty to a friend is greater – in trade, or in anything else – than my duty to a stranger. I do indeed owe a duty of justice to any stranger, but I do not owe him more. Analogously: a stranger is not as obliged as my friend to act in such a way as to preserve the marital chastity of my wife.

  11. In the future any crisis of conscience about whether or not a prospective inside unrighteous mammon valued stock trade is ethical may be mitigated by the electronic thought-work surveillance machine humanity will be physically plugged into.

    3rd party money as a medium of exchange versus the old barter system, had some primitive ambivalent taboo stink associated with it:

    ““The Kwakiutl called their money objects yaklelwas, which means “bad things,” a word that has the same root as ‘dead bodies” and “intestines.” When they had their potlatch money-destruction ceremonies they said they were “wiping off the shame” from their body, like one wipes off shit, by giving money away or destroying it.(11)”

    http://psychohistory.com/articles/heads-and-tails-money-as-a-poison-center/

    “What we call money is largely just cached murder. Bitcoin takes this lethal abstraction into direct competition with our own lives… by creating a makework network that sinks resources and electricity into pushing computers to their limits—for no actual purpose.”

    Darin Stevenson
    Cognitive Activism: Now
    Jun 8, 2016
    Bitcoin = Death Processors
    View at Medium.com

    And Google and Microsoft must think this patent is hilarious fodder for Snopes to refute conspiracy theorists:
    https://patents.google.com/patent/WO2020060606A1/en

    Fallen Man. Fallen Money.
    Fait Accompli says the Good Book.
    No buying-no selling without showing membership ID.

    Of course a work around exception will remain for Democratic voters at physical election polling places to not have to show ID. As well as for mail in ballots.

    The supermarket however will continue to demand I show my drivers license if there is a six pack of beer in my shopping cart.

    • That’s a fascinating comment, WT, with links to some fascinating essays. One of them makes some terrifically quoteworthy and original points:

      Money is strange.

      It seems to be something quite useful – a convenient way to facilitate exchange and acknowledge debt.

      Yet a simple experiment will show that money carries within itself more than just wealth. Take a ten-dollar bill and hand it to a friend. No explanation, just give it to him. A strange thing will happen. Your friend will feel uneasy about you, he may avert his eyes when he sees you, he may even avoid meeting you. The money you gave him seems to have transferred as much guilt as wealth.

      If you take a careful look at the money you have given him, you’ll see its twin aspects of wealth and guilt quite clearly. One side is called “heads,” and it usually has on it a head-the part of us with which we enjoy pleasures, eat, smell, hear, look. It represents wealth, the goods side of money.

      The other side is called “tails,” and it has on it symbols of death, guilt and destruction: tombs of dead people, birds of prey, branches representing sacrificial trees, etc. Even when the back portrays sexual symbols – as, for instance, the German twenty-mark bill does, with its phallic bow and female violin-they are shown next to a death-dealing bird, and thus represent sinful sex. These images represent the guilt, the bad side of money. Whenever you pass along money, you circulate both heads and tails, both goods and bads, both pleasure and guilt, both food and poison, both life and death.

      This ambivalent aspect of money can be easily seen in the words with which we describe it. The German word Geld and the English word “guilt” come from the same source – Geld in Old German meant “sacrifice,” and has the same source as vergeltung, “revenge.” Similarly, gift in German means “poison” in English. In most languages, the identity of gift and poison is found. The gift you gave your friend turned out to carry poisonous guilt with it.

      The reason for this dual aspect of money is not far to seek. Money represents obligation; this is why currency can be used in satisfaction of debts; it is the reason for the meanings of “bond,” which connotes both the mutual obligations entailed by any agreement (so, by extension the agreement itself, and the record thereof), and also the agape that is the affection of society, of welcome, fellowship, and inclusion. “Bond” is “band;” it is “bund.” Note that “bund” is “association” and “company;” it denotes, literally, both membership (“socius” is “member) and commensality (“companion” is “together + bread”).

      Obligation is stored labor. If you have money that you feel you did not wholly earn – as many wealthy people do, even when they *did* earn their money – then you feel guilt. Guilt is the feeling of an obligation that you owe, a debt, that you have not satisfied. It is worry about a cost one has imposed, that one has not paid. It is then the feeling of one’s own injustice, one’s conflict with reality, and with Truth.

      When you give your friend $10 with no explanation whatever, you engender his anxiety that he might owe you a debt that is represented by the bill, under some agreement that he had not noticed. Should he pay you back? When? With what? What must he do, to preserve your friendship?

      If you explain that the $10 is a pure gift, then he will not feel anxious respecting some unknown debt to you, but he will feel some anxiety nonetheless that he has been given some good he does not deserve. This is the reason for the emphasis in most societies on the notions of paying forward, of charitable giving to nobody in particular (as in potlatch or eleemosynary donations, that create no anxiety in this or that counterparty), or that the gift must always move. It is the reason that recipients of welfare usually resent their benefactors. It is the reason that the medieval monasteries made sure that the beneficiaries of their welfare services somehow repaid their benefits with labor, or worship, or *something;* so that their beneficiaries would not come to resent the monks, or their Lord.

      I hope it is obvious how all this ties up to the notion of sacrifice as a way of assuaging the guilt of unsatisfied obligations and restoring ritual purity. Potlatch has a ritual – which is to say, sacrificial – aspect; so does all commensal eating.

      Liturgy is literally the work of the people. That work is tainted, always, to be sure; nevertheless is it fundamentally good.

      Rites can be sacred or profane: there is the Mass, and then there is its parody and opposite, the Black Mass. So then likewise with the liturgy that is the economy. This is why the consummations of big deals – corporate mergers, marriages – are celebrated with feasting. Big weddings are potlatches.

  12. Kristor,

    I won’t be able to respond to all your points, as it would take me a week properly to digest them (one downside of blogging compared to older forms of written communication (or at least commenting on blogs): after a few days, the moment has passed). But a few responses follow:

    [Markets] asymptotically approach the price that takes into account all the information known to all the traders in the market. That data set *cannot* be complete, because each man and all men together are but partially scient. Thus, the market price is a pretty accurate approximation to what all men know and believe, and not to the truth.

    Ok, but all this information that gets integrated spontaneously merely reflects traders’ preferences (weighted towards the preferences of those with more wealth). Information that does not represent things irreducible to individual preferences – for example, the long-term economic health of a nation – is not properly accounted for in the free market except in ways that free market ideologues would typically regard as distortions of the free market. But the free market is itself a distortion because the ideology that drives it – efficient satisfaction of individual preferences – is false.

    I can grant that the free market is the best for coordinating information regarding what individuals qua individuals want. But why should that be the standard? Why should one man’s preferences count equally to those of another’s? Shouldn’t things rather be weighted towards the preferences of those who have more responsibility toward the common good (for example)? And why should preferences qua preferences be treated equally?

    My duty to a friend is greater – in trade, or in anything else – than my duty to a stranger. I do indeed owe a duty of justice to any stranger, but I do not owe him more.

    Change my hypothetical to selling my company stock to a man I just met on the street rather than to my friend. It still seems to me to be an unjust action on my part, and that the stranger has a right to believe himself ill-treated.

    ***

    How do we know Noah didn’t tell his neighbors of the impending flood?

    • We don’t know for sure that Noah told no neighbours about the Flood. Obviously he had to have told his family. But we do know that if he did tell neighbours, none of them took him seriously enough to build arks of their own (perhaps manifesting that skepticism of canny traders proper to information gained by word of mouth, to which Professor Cocks has averred).

      What we do know is that with respect to the information about the impending Flood, Noah was an insider. Unless he already owned everything he needed to build and stock the Ark, he had to engage in some trading to obtain at least some of it.

      My point was just that there is always an insider, in respect to every novel bit of information, and that insider is bound to act on that novel bit somehow or other. Every act involves trade-offs, and every act – including inaction – affects the acts and the welfare of others. Etc.

      Consider the insider who learns that his company is headed for trouble, and who – not wanting to risk the penalties due to insider trading – does nothing. Traders continue to trade as if the company is doing fine. I.e., they trade on false notions. Their trades then are relatively inapt, and they suffer. So does the market’s relative pricing of *all other securities:* because the employer’s stock is inaccurately overvalued, so all other securities are a skoosh undervalued. So, *all* traders are trading on relatively inaccurate notions about reality, and are thereby harmed at the margin.

      Information that [represents] things irreducible to individual preferences – for example, the long-term economic health of a nation – is not properly accounted for in the free market except in ways that free market ideologues would typically regard as distortions of the free market.

      As a subsidiaritan, I’m not a free market ideologue. Not all decisions can or should be devolved to individuals, and thus to their negotiations in respect to their divergent preferences. Sovereigns ordain and regulate markets. They set the rules under which markets operate. E.g., the rule that murder for hire is not a permissible commodity, either for sale or purchase. The art of government lies in the proper discernment of which sorts of decisions should be delegated downward, and in that delegation.

      Why should one man’s preferences count equally to those of another’s?

      They shouldn’t. They never do. As the poor are with us always, so are the oligarchs. The trick is to set things up so that the oligarchs are excellent men: aristoi who will do the right thing for the subjects under their guard or influence, and for the commonweal.

      Shouldn’t things rather be weighted towards the preferences of those who have more responsibility toward the common good?

      Yes; they always are. Again, the trick is to arrange things so that such men are aristoi.

      … why should preferences qua preferences be treated equally?

      They should not. They never are. The market is the procedure and medium that, among other things, adjudicates among various preferences, and evaluates them differently.

      This always happens, for there is always a market; there are, i.e., always people making decisions, effecting trade-offs, and exchanging goods and services with each other. The question is whether they are doing so efficiently, and in a manner that accurately reflects the real state of affairs – including the moral reality of the options open to people at any given moment.

      Change my hypothetical to selling my company stock to a man I just met on the street rather than to my friend. It still seems to me to be an unjust action on my part, and that the stranger has a right to believe himself ill-treated.

      When bad decisions get a company into trouble and its goodness – its real value – thus reduced, the wealth of the whole commonweal is reduced. This is so whether or not anyone has yet traded on the information, or even knows about it. Sooner or later, somehow or other, the market will learn about that reduction of value, and prices will adjust accordingly. Until that time, the market – the *entire* market, *all* trades – will be a bit whacked, a bit inaccurate, and the prosperity of the whole polis will suffer. When that time arrives, and no matter how the market first learns about the reduced value of the company, some traders will lose. They will profit less on their trades than they might have hoped. This is just math. It is inescapable.

      So, *some traders or other* are going to suffer the ill that your counterparty – whether he was a friend or a stranger on the street – suffered on account of your insider trading. But the commonweal will benefit from its more accurate adaptation to reality.

      Make sense?

      • I might be wrong, but I think you’ve stretched the definition of ‘insider trading’ to ‘acting with privileged information’ and that’s unhelpful.

      • I googled “Insider trading definition,” and the first result was:

        The illegal practice of trading on the stock exchange to one’s own advantage through having access to confidential information.

        SEC has characterized all sorts of obvious outsiders as insiders, simply because they traded on not yet published information that they had learned from conversation with someone else (who got it from someone else, who got it from someone else, etc.). All stock tips are either inside information or noise – or, almost always, some combination thereof. Anyone who trades on stock tips (even if those tips are noisy) is liable to prosecution as an insider. Every such “insider” – whether or not he is in fact privy to the as yet little known truth about the likely future fortunes of a company, or rather to some gross distortion thereof generated by the noisome game of telephone – trades on private assessments of the relative values of stocks, which are eo ipso “non-public;” i.e., on stock tips.

        The bottom line: to trade against the market on the basis of the presumption that you know better than the market *just is* to trade on information that you think the rest of the market does not yet properly reckon: namely, your own assessments.

        When it comes to his own evaluations of things, everyone is an insider.

        Were it otherwise, there could be no market. Were it otherwise, everyone would value every good at exactly the same price, and so no transactions would proceed. Economic activity – all of it (for, all human acts are economic, and are completely reckoned ontologically, whether or not their effects are adequately captured by our accountings) – would then cease. So, humanity would cease.

      • Hi Kristor,

        This is the part where I think we might disagree:

        The market is the procedure and medium that, among other things, adjudicates among various preferences, and evaluates them differently.

        This always happens, for there is always a market; there are, i.e., always people making decisions, effecting trade-offs, and exchanging goods and services with each other. The question is whether they are doing so efficiently, and in a manner that accurately reflects the real state of affairs – including the moral reality of the options open to people at any given moment.

        Yes, preferences are evaluated differently by the market, so some preferences will be regarded as being more valuable than others: but this is only because of whatever preferences men happen to have. If more men prefer A over B, the market will evaluate A as being more valuable than B. So the standard is merely one of maximum preference satisfaction, there is no objective standard by which to judge certain preferences as objectively superior to other preferences, except accidentally insofar as individual preferences correspond to what is objectively superior. The market, for example, treats whether particular consumer behaviors are better for short-term or long-term as an arbitrary consumer preference. And we all know that without societal constraints in place, men will often opt for the short-term. But external constraints on the market will reduce its efficiency.

        As for efficiency, its value depends on the goal you are trying efficiently to attain. A decadent nation with free market economics will simply efficiently trade away all its inherited wealth for cheap imported consumer goods. It will sink into debt, but at least it will do so efficiently.

        Crowning efficiency as king is what drives the ever-more impersonal nature of the market, the phenomenon of giant faceless globalist corporations, and man as an interchangeable cog in the machine.

        ***

        Re: insider trading. Ok, I think I understand your argument. To summarize: the thing that is allegedly wrong with insider trading is that there is a discrepancy in information/knowledge between the two parties, and one party uses this discrepancy to his advantage to make money off the other party. But all trade involves some disparity in information between the two parties, and it’s absurd to say that all trade is wrong. Ergo, insider trading is not wrong.
        Moreover, by proscribing insider trading, we artificially encourage people to continue to trade goods that are under- or over-valued, which is itself unjust.

        Some off-the-cuff responses, not to be taken as any sort of dispositive rejoinder:

        Might there be a difference in kind between the sort of information that an insider is privy to, compared to the general case? One possibility: in the case of insider trading, the information is confidential, while in the general case, the relevant information is in principle available to anyone (even if not in actuality possessed by everyone). Another possibility: with insider trading, the information is about things actual, though known only by a few, while in the general case, people trade based on information about things that are potential (e.g., I make an educated guess that there might be oil on this land, so I buy it; or I’ve done a lot of research on weather patterns, and I think this might be a bad hurricane year, so I make my purchases accordingly).

        Yes, what counts as an ‘insider’ could be tricky. But might this not just be a sort of demarcation problem? i.e., a problem of epistemology rather than one of ontology?

        The example I gave earlier, of selling someone my car that I know has a bad water pump: what is the moral difference between this and insider trading? Or in your view, is selling the lemon to the unsuspecting buyer not immoral?

      • Ian, thanks a ton for your deep engagement with these topics. As is usual in such conversations, I find that it is prompting a deeper engagement on my own part, so that I learn. Such learning has been among the more important benefits to me of my involvement with the Orthosphere.

        We do not disagree with respect to efficiency. It does not suffice to a virtuous society, or – therefore – to a prosperous society. But, the virtue of efficiency is necessary to a virtuous society. Inefficiency is a weakness that, uncorrected, will eventually doom a society, no matter how otherwise virtuous it may be. The virtue of market efficiency is a sort of the virtue of honesty, and so of truth. A society must trade on truths if it is to survive. It must also, of course, be ordered to the good; and this entails that its members must be preponderantly ordered to the good.

        But then, notice that consistent fidelity to truth entails fidelity to *moral* truth; and that in turn entails fidelity to *aesthetic* truth. A society that emphasizes trading on truth will want to take account of the moral and aesthetic character of the goods and services it prefers; and in an honest confrontation with those characters, rational intelligent agents are generally going to realize that they prefer good and beautiful things to evil or ugly things.

        So, we find that the virtues of rationality and intelligence are also necessary for social success – for the success of an individual in his social matrix, and for the success of his society.

        As sages have noticed for millennia, the virtues all tend to reinforce each other; for, they depend upon each other.

        There might be a difference in kind between inside information and outside information (as I shall call it for the sake of simplicity). But I’m pretty sure your two suggestions don’t hold up. If the inside information *remains* confidential, then it won’t move the price of the stock. The insider is motivated to trade on it because he thinks it likely that the information will not remain confidential. He trades on a potentiality. And in so doing, he is like the geologist who thinks it likely that oil is present under a plot of land, with the difference that rather than studying the science of geology and surveying the geological features of territories, he has studied the arts of business and the surveyed the economic features of companies.

        Note the plural: companies. The inside trader must have a hunch about the future course of prices of his employer’s stock *vis-à-vis those of other companies.* And to do that, he must know a fair bit about a lot of different companies, especially those in his own industry, so that – for example – he can be pretty sure whether his company’s failure to find oil under the properties it has so dearly bought and explored in Uganda is shared by similar failures of competitors. Both the geologist and the insider must know the lay of many sorts of lands.

        NB: the consulting geologist is liable to be characterized as an insider if he buys stock in a corporate client on the expectation that the client is going to take his advice to buy that land in Uganda.

        Yes, what counts as an ‘insider’ could be tricky. But might this not just be a sort of demarcation problem? I.e., a problem of epistemology rather than one of ontology?

        Sure. But then, to know whether you’ve properly identified a true insider, you first need a true and specific definition of what constitutes an insider. And it is exactly that definition that has been so difficult to pin down. The tendency has been to characterize anyone who knows information that is not yet public as an insider. But as we’ve seen, that dog don’t hunt.

        In trade, both counterparties are responsible for informing themselves about the goods they propose to buy. The man who sells you a car with a defective pump probably doesn’t know that you work for a shop in the next town over that specializes in refurbishing old cars and selling them at a big profit, and that the demand for restored cars of the type he is selling you is through the roof right now. The man who sells you a broken old roll top desk for $100 might not be aware that you know where to sell it for $100,000. The executive who sells you stock on inside information might be such an idiot that he doesn’t suspect that you have inside information, too, which contravenes and trumps his own. E.g., he knows his company is in trouble, but he doesn’t know that a bidding war for it is already beginning, in part *because* it is in trouble. It’s really all over the map.

        Sellers labor under a duty of honesty regarding the goods they sell. If you ask the seller what is wrong with the car, he ought to tell you. If he lies to you, you have a cause of action against him, for then he has defrauded you. But he has no duty to tell you everything he knows about the car without your having asked. Nor do you owe him a duty to tell him everything you know about it, unless he asks.

        We do owe such a duty – a duty of care – to our friends and family. This is why it is bad policy to do business for profit with friends and relatives.

        Notwithstanding all that, a seller who cheats on his duties to his counterparties tends to ruin his reputation. An executive who arranges to profit on the stock market from the fortunes – good or bad – of the employer to whom he owes a fiduciary duty of loyalty can find himself unemployable, or even in court, should his hijinks become public. So, it is usual for businessmen to care for their counterparties, so as to preserve their reputation and remain in business. This is why companies generally accept returns, guarantee their products, and so forth.

  13. Kristor,

    Likewise: thank you for engaging. I have found that the mere act of putting pen to paper, so to speak, in formulating responses often helps clarify things. Earlier in the thread, for example, I was going to respond to some comments of yours regarding administration, but writing it out caused me to realize I was missing a key distinction that negated my objection.

    I don’t think I find anything necessarily to disagree with in your latest regarding efficiency.

    I’ll have to mull over the rest of your comment. I’m not sold on the morality of insider trading, but perhaps you have some insider information I don’t :).

  14. Kristor,

    I have a question tangent to a previous comment and questionably germane to the OP, so if there is a better place to take this, please let me know.

    The relevant bit is this:

    Consider the insider who learns that his company is headed for trouble, and who – not wanting to risk the penalties due to insider trading – does nothing. Traders continue to trade as if the company is doing fine. I.e., they trade on false notions. Their trades then are relatively inapt, and they suffer. So does the market’s relative pricing of *all other securities:* because the employer’s stock is inaccurately overvalued, so all other securities are a skoosh undervalued. So, *all* traders are trading on relatively inaccurate notions about reality, and are thereby harmed at the margin.

    Simplifying to be kind of like a syllogism, it seems to me you are saying this:
    1- When an insider receives material information about a firm, all other traders are trading on false notions of that firm.
    2- The firm being traded is on a public market; when it is traded on false notions, its value relative all other firms are based on false notions
    3- Therefore, all traders and all firms are trading on inaccurate notions about reality and are harmed at the margin

    The important bit to me seems to be the third part of the syllogism above, that when traders trade on inaccurate notions about reality then they are harmed at the margin.

    What notions about reality are relevant to a marketplace? An Atheist investor trades on a version of reality that does not have a loving God–an inaccurate notion of reality. Flat Earthers or moon-landing-deniers who invest in markets also trade on inaccurate notions of reality.

    It seems to me this could mean one of two things: Either A) The market doesn’t (and isn’t designed) to accurately reflect objective values but is only designed to reflect peoples attitudes towards objective values; or B) The market is supposed to reflect objective values but cannot so long as there are heterogeneous views about reality.

    If (A) is true, then markets reflect attitudes more than objective value and so insider trading cannot really cause harm because it is just one species of an infinite number of species of realities (accurate or not) cooked into the noise level of markets. If (B) is true, then the ideal market has no fluctuations at all because everyone is in agreement about reality and so in agreement about value, and there’s no reason for markets to be volatile. The fact that this ideal is unreachable would imply only that there are competing realities, and the objective value of a given firm is only estimable relative the dominant worldview at the time the value is measured. Kind of like a Heisenberg Uncertainty principle for stocks.

    If we cannot restrict which notions about reality are relevant, then that means all notions are relevant, and not just investors attitudes but non-investors attitudes are cooked into the market. And if this is the case, then maybe we have a third possibility, C) that the sum of all these notions about reality really do present an accurate and objective measure of value because all attitudes, actions, and notions are baked into the marketplace, regardless of their accuracy. Which again, would preclude insider trading as a thing because at the moment knowledge is transferred, that information is baked into the market, whether the insider invests with it or not.

    • Your syllogism is fair. Your option C is close to accurate. All notions are relevant to the market. The operations of the market integrate all those notions – or rather, they are always in the process of doing so, and cannot complete that process (because things keep happening). But they do not provide us a perfectly accurate measure of objective value, because that objective value is perfectly knowable only to omniscience. From the fact that we cannot know perfectly it does not however follow that we can know nothing at all about the objective value of goods. Market integration of all partiscient human knowledge is our closest possible human approximation to objective accuracy of evaluation.

      Incorrect notions and evaluations (e.g.: “there is no God;” “there is no objective moral law;” “the weather in Texas right now is clement;” “usury is OK;” “Biden won fair and square;” “the paper mill is operating normally”) sooner or later collide with GNON in a painful way. In sane minds, pain prompts deliberation and correction. Pain signals intellectual or moral or practical error of some sort. The normal response is to search for a way to eliminate that error, to the extent practicable. And because normal economic agents are all strongly inclined to eliminate pain, they incline the market to eliminate noise and error. This is to say that they incline the market to the discovery of the truth about things, so far as it can be known, and so to correct their errors.

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