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Should Insider Trading be Legalized?

Summary:
New York City businessman Telemaque Lavidas was recently found guilty of insider trading. He was charged with utilizing inside information about a U.S. biotechnology company, and passing it on to Georgios Nikas, a Greek entrepreneur. Lavidas and all others charged with this so-called “crime” should be freed, immediately. Insider trading should be legalized forthwith: it is a victimless crime. Consider the following. A is a wealthy investor, B is a helicopter pilot and a geologist. A is looking for gold, or diamonds, or oil, or copper or some other such mineral. He hires B to go “out there” and seek promising rock formations. In the first contract, A offers B a large salary, say 0,000 per year, plus all expenses, and requires the B share information about his

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New York City businessman Telemaque Lavidas was recently found guilty of insider trading. He was charged with utilizing inside information about a U.S. biotechnology company, and passing it on to Georgios Nikas, a Greek entrepreneur.

Lavidas and all others charged with this so-called “crime” should be freed, immediately. Insider trading should be legalized forthwith: it is a victimless crime.

Consider the following. A is a wealthy investor, B is a helicopter pilot and a geologist. A is looking for gold, or diamonds, or oil, or copper or some other such mineral. He hires B to go “out there” and seek promising rock formations. In the first contract, A offers B a large salary, say $500,000 per year, plus all expenses, and requires the B share information about his discoveries with no one else. In the second contract, A offers B a small salary, say $50,000 per year, again plus all expenses, but now allows B to share information about his discoveries with a few friends and family members, and to use this knowledge on his own account (so as to purchase likely mineral rich lands for himself).

No one would quarrel with the first contract. If B spills the beans, he should be considered guilty of contract violation, and theft, but not insider trading.

But why is the second contract illegal? In the first case, A bears the lion’s share of the risk, B very little, and all the discovery benefits accrue to A.  In the second, A takes on a much smaller share of the risk (he pays B a small salary), B takes on a larger share, and all the discovery benefits accrue to both in some agreed upon fashion. A contract is a contract is a contract. Contracts are the very foundation of the free economy. Unless something is seriously untoward, the second agreement, too, should be considered valid.

Why do most people recoil from this eminently reasonable conclusion?

It is because they view information not as an economic good, but rather as something vaguely offensive when commodified. You have inside information? Fine. No harm, no foul. But, you have the audacity to sell it, to benefit from it yourself? Then, all legal hell breaks loose with popular support. But a reductio ad absurdum ought to put paid to that sort of thinking. The cello teacher has inside information about playing that instrument. She’s good at it, you’re not. This woman should make her knowledge about the cello available to you for free? That is the logical implication of laws against selling, or benefiting from, inside information. Were we to generalize from this, politicians would be correct: no institution of higher learning ought to be allow to charge tuition! Communism opposes the commodification of pretty much everything. Those who support insider trading prohibitions are thus, in effect, whether they realize it or not, partial communists.

Where are the victims? Who lost out, who has any rights in the matter, from the second contract between A and B? No one, that is who. Well, yes had B told all to everyone about which land is likely to be mineral-laden, the present owners would have been able to sell their terrain for a higher price. But they had no right to this information in the first place.

Not only are there no victims despoiled of anything to which they have a right, but insider trading is a benefit to the wider economic community. It is an aphorism in economics that the equilibrium price, or wage, or interest rate is the most efficient one. At other levels, shortages and surpluses ensue. Happily, while the market exceedingly rarely attains this happy situation, it is always moving in that direction.

How does insider trading impact this phenomenon? Simple: this behavior moves us closer, more quickly, to the situation where supply and demand equate with one another. The more correct information that registers in markets, the better for the economy; the more accurate are prices, which are necessary for rational resource allocation. Inside information is information. If it is allowed to be incorporated in prices, the more accurate they become. But when the law criminalizes such behavior, less of it will occur.

The real problem is not inside traders, who incorporate what tends to be correct information into the market process. It is, rather, “outside traders,” whose knowledge of the market is negative. They are the ones who tend to move us away from the equilibrium markets, in effect, are seeking. Their only saving grace is that when they invest, they tend to lose money and thus have less sway over prices. On the other hand, “there’s a sucker born every day,” so they keep on entering the financial fray. Well, they are not criminals, either.

Free all political prisoners. Free all perpetrators of victimless crimes. Free all insider trader convicts. Michael Milken was recently pardoned for this “crime.” All of his fellow “criminals” in this regard should be treated in the same manner.

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