by Murray Rothbard
(Contents by Publication Date)
Panic on Wall Street
There is a veritable Reign of Terror rampant in the United States--and everyone's cheering. "They should lock those guys up and throw away the key. Nothing is bad enough for them," says the man-in-the-street. Distinguished men are literally being dragged from their plush offices in manacles. Indictments are being handed down en masse, and punishments, including jail terms, are severe. The most notorious of these men (a) was forced to wire up and inform on his colleagues; (b) was fined $100 million; (c) was barred from his occupation for life; and (d) faces a possibility of five years in prison. The press, almost to a man, deplored the excessive lightness of this treatment.
Who are these vicious criminals? Mass murderers? Rapists? Soviet spies? Terrorists bombing restaurants or kidnaping innocent people? No, far worse than these, apparently. These dangerous, sinister men have committed the high crime of "insider trading." As one knowledgeable lawyer explained to the New York Times: "Put yourself in the role of a young investment banker who sees one of your mentors led away by Federal marshals. It will have a very powerful effect on you and perhaps make you realize that insider trading is just as serious as armed robbery as far as the government is concerned."
This attorney's statement is grotesque enough, but it actually understates the case. Armed robbers are usually coddled by our judicial system. Columnists and social workers worry about their deprived backgrounds as youths, the friction between their parents, their lack of supervised playgrounds as children, and all the rest. And they are let off with a few months' probation to rob or mug again. But no one worries about the broken homes that may have spawned investment bankers and inside traders, and no social workers are there to hold their hands. They receive the full might of the law, and are sent straight to jail without stopping at "Go."
A major difference between the "crime" of insider trading and the other crimes is that insider trading is a "crime" with no victims. What is this dread inside trading? Very simply, it is using superior knowledge to make profits on stock (or other) markets. A terrible thing? But this, after all, is what entrepreneurship and the free-enterprise system is all about.
We live in a world of risk and uncertainty, and in that world, the more able and knowledgeable entrepreneurs make profits, while ignorant entrepreneurs suffer losses and eventually get out of business altogether. This is what happens, not only in the financial markets, but in business in general. The assumption of risk by businessmen, seeking profits and hoping to avoid losses, is a voluntary assumption by businessmen themselves. Not only is this process the essence of the free market, but the market, by rewarding able and farsighted men and "punishing" the ignorant and short-sighted, places capital resources into the hands of the most knowledgeable and efficient, and thereby improves the workings of the entire economic system.
And yet there are no victims of inside trading as there are in robbery or murder. Suppose that A holds 1,000 shares of XYZ Co. stock, and wants to sell those shares. B has "inside knowledge" that XYZ will soon merge with Arbus Corp., with expected increase in value per share. B steps in and buys the 1,000 shares for $50 apiece; B, let us say, is right, the merger is soon announced, and the XYZ shares rise to $75 apiece. B sells and makes $25 per share, or $25,000 profit. B has profited from his inside knowledge. But has A been victimized? Certainly not, because if there had been no inside knowledge at all, A would still have sold his shares for $50.
The only difference is that someone else, say C, would have bought the shares, and made the $25,000 profit. The difference, of course, is that B would have made the profits as a knowledgeable investor, whereas C would have been simply lucky. But isn't it better for the economy to have capital resources owned by the knowledgeable and far-sighted rather than merely by the lucky? And, further, the point is that A hasn't been deprived of a dime by B's inside knowledge.
There is, in short, nothing wrong and everything right with inside trading. If anything, inside traders should be hailed as heroes of the free market instead of being apprehended in chains.
But, you say, it is "unfair" for some men to know more than others, and actually to profit by that knowledge. But what kind of a world-view dubs it "unfair" for some men to know more than others? It is the world-view of the egalitarian, who believes that any kind of superiority of one person over another--in ability, or knowledge, or income, or wealth--is somehow "unfair." But men are not ants or bees or robots; each individual is unique and different from others, and ability, talent, and wealth will therefore differ. That is the glory of the human race, to be admired and protected rather than destroyed, for in such destruction will perish human freedom and civilization itself.
There is another critical aspect to the current Reign of Terror over Wall Street. Freedom of speech, and the right of privacy, particularly cherished possessions of man, have disappeared. Wall Streeters are literally afraid to talk to one another, because muttering over a martini that "Hey, Jim, it looks like XYZ will merge," or even, "Arbus is coming out soon with a hot new product," might well mean indictment, heavy fines, and jail terms. And where are the intrepid guardians of the First Amendment in all this?
But of course, it is literally impossible to stamp out insider trading, or Wall Streeters talking to another, just as even the Soviet Union, with all its awesome powers of enforcement, has been unable to stamp out dissent or "black (free) market" currency trading. But what the outlawry of insider trading (or of "currency smuggling," the latest investment banker offense to be indicted) does is to give the federal government a hunting license to go after any person or firm who may be out of power in the financial-political struggles among our power elites. (Just as outlawing food would give a hunting license to get after people out of power who are caught eating.) It is surely no accident that the indictments have been centered in groups of investment bankers who are now out of power.
Specifically, the realities are that, since last November, firms such as Drexel Burnham Lambert; Kidder Peabody; and Goldman Sachs; have been under savage assault by the federal government. It is no accident that these are precisely the firms who have been financing takeover bids, which have benefited stockholders at the expense of inefficient, old-line corporate managerial elites. The federal crackdown on these and allied firms is the old-line corporate way of striking back. And looking on, the American public, blinded by envy of the intelligent and the wealthy, and by destructive egalitarian notions of"fairness," cheer to the rafters.