No Coercion

Insider Trading in a Stateless Society

A reader has asked me about the libertarian answer to insider trading. This is indeed a tough one at first glance. How exactly can a society without a monopoly public government prevent the 'dangers' people associate with insider trading?

First, it's necessary to point out that insider trading does not involve the initiation of force against someone, so it shouldn't be illegal even under a minimal state. Insider trading laws are designed to prevent corporate insiders from profiting from non-public information obtained in the performance of their fiduciary duties to the corporation. At worst, this could result in a civil suit (if the insider violated an agreement with the corporation), but not a criminal charge levied by government prosecutors. If profiting from non-public information should be illegal in one instance, why not in all? Shouldn't everyone who's ever gotten a job because they knew the right person be prosecuted? Should someone be thrown in jail because they work in the kitchen of a less than sanitary restaurant and wisely avoid eating the food there?

And even if insider trading in some instance resulted in the loss of stock value for other shareholders, there's nothing inherently wrong with that. There is no such thing as the right to the value of something. You don't have the right to a particular value of your home, and you likewise don't have the right to a particular value of stocks you own. Value is determined by the interaction of a multitude of individuals and their economic decisions. To claim a right to the value of something is to claim the right to control the decisions of all those other people. This simple reductio ad absurdum shows that there is no right to value, only to actual property.

Insider trading prohibitions have to do with information and its use. Information is not inherently owed to anyone. Information has value. It takes effort to acquire information. Some people and firms specialize in acquiring information. They can charge others for access to that information, either on a case by case basis, or by monthly subscription, or some other arrangement. Some information requires more effort to acquire and would thus command a higher price in an open market. In a completely free society, it's likely that businesses and organizations would emerge to collect and disseminate information about insider trading. Today we already have things like Consumer Reports--people pay money to get the scoop on various goods and services. The Wall Street Journal already publishes insider trading information on a weekly basis.

More to the point, as Milton Friedman and other economists have argued, insider trading is actually a good thing. Corporate executives unloading the stock of their own company sends a signal to anyone paying attention that all is not well with that company, and it does so much faster and more completely than any process resulting from government mandates and restrictions.

There is no rational basis for the prohibition of insider trading. It stems, as many have observed, from envy--from a deep socialistic impulse in many people to prevent others from being wealthier than themselves. I give great strategic credit to the socialists that they've succeeded over the past century in their propaganda efforts to convince so many Americans that there's actually something bad and 'un-American' about insider trading. If only the defenders of freedom and prosperity were so strategically adept in this 'battle for the hearts and minds' of America!

As always, I welcome any reader comments or suggestions for future blog posts. I want to write about the issues you're interested in--so send me your thoughts!

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  1. Without some regulation on insider trading, investing in stocks of any companies where insiders can substantially move the market prices would become more risky. Probably not a good thing if you think investment in small companies is beneficial to the economy.

    I’m not suggesting that people should be locked up for violating insider trading limitations and reporting requirements. But if the state wasn’t enforcing insider trading regulations, the exchanges would probably find a way to enforce regulations by contract or risk losing business.

    By the way, I believe the Wall Street Journal is able to report inside trades because the government requires those trades to be reported.

  2. Well I certainly agree that private, voluntary responses could evolve–what exact form they might take I don’t know. Perhaps exchanges would respond. Perhaps individual corporations would do things to mitigate any problems. Either way, the costlier any given risk, the more incentive private actors have to come up ways to internalize the costs of the risk.

    You may be right about the Journal–I’m not sure. But I imagine it would provide an analogous service in a purely free market–it would just be based on information it was able to gather itself (maybe with a team of financial super-spies!).

  3. The real problem is the concept of incorporation versus human life.

    Look at this article by Jeff Kaplan, that neatly sums it up:

    In evaluating allegations that U.S. military forces deprived four British men of human rights during two years they were held captive in Guantanamo Bay prison, a U.S. appeals court found an innovative way to let the Bush administration off the hook. Two of three judges ruled the men — because they are not U.S. citizens and, technically, were not imprisoned in the U.S. — were not legally “persons” and, therefore, had no rights to violate.

    While those judges were defying common sense and decency by denying legal personhood to living human beings, an appeals court in Boston has been reviewing an April 2007 decision by Federal Judge Paul Barbadoro that engaged in a different form of judicial activism — granting human rights to corporations.

    Barbadoro struck down a New Hampshire law that prevented pharmaceutical corporations from learning exactly what drugs doctors prescribe and how much they prescribe. The law aims to protect doctors and, indirectly, their patients, from drug companies pressuring doctors to choose their products.

    The judge’s grounds? He claims corporations, as legal persons, have “free speech rights” that would be infringed by such a measure.

    The real issue in these cases (Maine recently passed a similar law) isn’t free speech at all; it’s manipulation and control. The drug salespeople only will decide what to say after poking into the doctors’ prescription records. Under the guise of protecting speech, Judge Barbadoro denied both legitimate privacy rights of doctors and key protections to ensure patients are prescribed drugs based on their medical situation, not pressure applied to their physician.

    Taken together, these two rulings are a perplexing and dangerous development. The founding principle of our country is right in the Declaration of Independence: all people are “endowed by their Creator with certain unalienable Rights.” It is not for judges to decide who is and who is not a human being.

    Nor should the courts play Creator by endowing legal constructs like corporations with human rights. Our constitutional rights exist to prevent large, powerful institutions — whether governments, corporations, or other entities — from oppressing us humans.

    For too long a strange dichotomy has persisted between principled people on the political left and right wings. The left wing often warns against the growing power of business corporations. The right wing complains the left ignores the overweening power of the government and is “anti-business.”

    But many people on both sides have been seeing only part of the same elephant. What’s happening is a merger of corporations and state.

    Already there are corporate “black holes” for human rights that rival government affronts like Guantanamo. Under the Bush administration’s legal framework for Iraq during its occupation, the Iraqi government wields no authority over Blackwater corporation’s security guards.

    And it’s not clear the U.S. government does either. As a result, we may never see anyone punished for Blackwater’s wanton killing of Iraqi civilians in Baghdad last September.

    Then there’s the case of Jamie Leigh Jones, an American employee of Halliburton/KBR in Iraq who claimed she was gang raped by co-workers in 2005. U.S. officials reportedly handed the evidence to KBR, whereupon the evidence apparently disappeared. Nobody in Congress, Democrat or Republican, has been able to persuade the Bush administration to reveal what it has done about the case since then.

    Halliburton/KBR, like Blackwater, apparently enjoys the rights of a person, but not the responsibilities.
    Editor’s note: shortly after completing this article, we learned of this shocking story: Judge Denies Allows Halliburton to Force Sexual Assault Case Out of Court

    The danger of “corporate personhood” is a bit like global warming; people have warned us of the threat for decades only to go unheeded because the dire consequences seemed far-fetched.

    But look at what’s happened to the First Amendment. Corporations use it to strike down laws clearly designed to protect citizens, even while courts deny prisoners the right to know what evidence the government is using against them. It’s time for alarm.

    We should take offense whenever we hear the dangerous notion of “corporate citizenship” promoted. Soon, the only citizens with real power in the United States may be the corporate kind.

  4. Interesting. I certainly agree that government definition of personhood that excludes some actual persons (the British prisoners) is absurd. But I’m not sure I understand why, in the absence of government machinations, the owners of a corporation would not be able to exercise their natural rights through the corporate entity.

  5. It seems to me that insider trading is actualy an act of fraud due to an ommision of a relevant fact from the transaction which if the person on the other end of the transaction knew, he may would not have proceded with the trade. In this, two of the three requirements of fraud are fufilled: The suppression of relevent information by the inside trader that if revealed would have prevented said transaction and the reliance of the other person that the inside trader is acting in good faith. If the person on the other side of the transaction suffers financial harm, that then fufils the third requirement and thus constitutes fraud.

    PS Sorry for necroing this old post, but after comming across it, it made me think and I reasoned out the above.

  6. I think I see where you’re coming from, but I don’t think that’s right. The person selling stock that they believe (based on insider knowledge) is soon going to go down in value is not defrauding anyone. In fact, to forcibly prevent them from selling the stock would be an act of aggression, correct?

  7. If i sold a copper mine, and withheld the fact that the mine was worthless due to the fact that the mine was actually depleted, that would be fraud, would it not? Then whats the difference between that and selling my stocks from a company I knew was bankrupt due to insider knowledge to someone who does not have access to the companies files?
    If it is fraud, then the insider is the one acting in aggression; any fraud charges would be a retaliatory force to obtain restitution.

  8. Absence of insider trading laws would make the stock company much less attractive for investment and/or speculation, and would thus reduce the power of corporations.

    • Hmm…maybe. If so, that could be a good thing (assuming corporations currently have a disproportionately large amount of power compared to what they would have in a free market).

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