Law dean rationale for making insider trading legal would allow murder, theft & anything else bad people do

By Marc Jampole

It seems as if the bad idea of the week always shows up on the opinion pages of The Wall Street Journal.

This week it’s the idea that insider trading of stocks should be legal, proffered by Henry Manne, dean emeritus of the George Mason University School of Law in an article titled “Busting Insider Trading: As Pointless as Prohibition.” 

Mann’s reasoning is that as in the case of the prohibition of drinking alcohol in effect in the United States from 1920-1934, the law against insider trading doesn’t stop people from doing it. If people are still going to do it, it might as well be legal.

By Manne’s reasoning, murder, theft, incest, rape and every other crime might as well be legal, since people are still going to do it.

We all know, however, that if murder, theft or illegal trading were legal, instead of just a few sociopaths doing it, a large number of people would. I don’t think Manne would advocate making murder legal.

The difference between Prohibition and these crimes—and insider trading—is the difference between “who cares” and “it’s wrong.” It’s not wrong to drink alcohol and is never was except to snoopy moralists. Nor does drinking alcohol hurt anyone except for the drinker, except when that drinker does something stupid like drive or give it to minors, which are still against the law.  

But it is wrong and unethical to buy and sell stocks based on information that the general public doesn’t have yet. It also hurts other people, especially when the insider is selling a stock that’s about to go into the tank. Near the end of his article, Manne makes the outrageous claim that insider trading does no harm and can have significant social and economic benefits.  Of course he never says what those benefits are. That’s because there are none. Insider trading has been illegal since 1934 because it is unfair and it allows the insider to profit unfairly. It is akin to getting an extra out in baseball or starting on third base. I know that a lot of Wall Street insiders did start on third base and think they hit a triple, but that sense of privilege often held by the moneyed —so many of whom are the bankers and executives who obtain the most insider information—should not and does not legally extend to special treatment as an investor.

Manne hides the lunacy of his argument behind an extended simile—the comparison of the FBI tracking bootleggers and other gangsters and the efforts of Manhattan federal prosecutor Preet Bharara to go after insider traders such as Stephen A. Cohen’s firm.  He spends a goodly number of words glorifying Elliott Ness, only to point out that Ness’ gallant activities led nowhere, since prohibition was repealed. His analogy is bogus not only because insider trading can’t be compared to drinking alcohol, but because the focal point of the comparison—Eliott Ness—didn’t really get much done. His reputation is mostly manufactured by the “untouchable” television series and movies.  In real life, he was pretty mediocre, although he did help gather evidence that put gangster Al Capone away—on charges of tax evasion!

I suppose there is some consistency in creating a false comparison in which one of the objects under comparison is also false.

Whenever I see articles like this one, I wonder why a major newspaper—and specifically the Wall Street Journal—would publish them. I know that Manne has a big name in legal circles as an emeritus dean and as a legal theoretician. His big idea—to use economics to analyze legal problems—certainly fits into the Journal’s bailiwick.  But a crackpot idea is a crackpot idea.

British Lord puts a happy face on environmental degradation and resource shortages

By Marc Jampole

One of the most powerful rhetorical devices is to cherry pick your criteria to get the result you want.  We see a classic example of it in “The Scarcity Fallacy,” the lead essay in the Wall Street Journal’s “Review” section this week. Author Matt Ridley, a member of the British House of Lords, says that “ecologists worry that the world’s resources come in fixed amounts that will run out, but we have broken through such limits again and again.”

Lord Ridley’s logical fallacy, which animates his rhetorical trickery, is that he refers only to the human race over the past 10,000 some odd years of recorded history. If he looked either closer or longer term, he might not conclude that we have always overcome resource shortages so we will in the future.

The Spanish philosopher Ortega y Gasset once said that the best point of view from which to look at history is where you can just make out the warts on Cleopatra’s nose. Detail, but not so close that all you see is detail.  Ortega believed this theoretical sweet spot reveals overarching truths.

Here’s an extreme example of the impact of measurement parameters on conclusions: In evaluating the greatest center fielders of all time, baseball numbers guru Bill James noted that he usually used the best five years of a career as a major criterion and by this measurement Mickey Mantle beat Ty Cobb, but if he had measured the best 4, 6, 7 or 8 years, Cobb would win. 

In Ridley’s case, he’s measuring all of humanity over 10,000 years.

But what if he looked more closely? He would find that a number of human societies and cultures have disappeared because of resource depletion: the American Indians at Cahokia, the Pacific Islanders on Rapa Nui, the ancient Minoans on Crete, the citizens of Mohenjo-Daro in the Indus Valley, to name a few.

Ridley could have also taken a wide lens and looked at the 3.6 billion year history of life on earth, or even the 200 million years since mammals first emerged. In both these cases, one of the big lessons of history is that the overwhelming majority of species will eventually become extinct, as they fail to adapt to the ever-transforming environment on Earth.

The danger in Ridley’s conclusion that we’ll figure it out because we have always figured it out in the past is that everyone who says it, including Ridley, uses it to justify a laissez faire approach that lets the marketplace determine how we meet the resource depletion challenges that we face. In fact, if we are to survive as a species, we need to look at things in a new way and organize societies in new ways. Many are working to save human beings from extinction, for example the scientists researching planets that have living conditions similar to Earth’s. These scientists know that our sun’s ever-intensifying heat will evaporate all the water on the earth in about a billion years, so we have to find another place to live before then. The work of these scientists requires public support and public support requires higher taxes, something that lassiez-fairenistas never like. Note, too, that Ridley applauds fracking as an example of human ingenuity that shows we’ll overcome every resource shortage. Well, maybe not the shortage of clean air and water that fracking causes. 

Ridley also thinks that large parts of the world haven’t yet been introduced to fertilizer and other advanced agricultural techniques, which seems to be a meager proof that we won’t run out of food. Not only that, he lauds the positive influence on the environment that humans have because birds and other animals often carry fertilizer used on crops to the forests. The article presents the world as seen through the rose-colored glasses of a true believer in technology controlled by private interests.

Ridley is so busy shoveling fertilizer about fertilizer that he ignores the real degradations we are inflicting on our planet and the real threat of resource depletion to our future well-being. His complacent and smug self-satisfaction with the human race will no doubt make many breathe a sigh of relief and go about their business using resource profligately. After all, we’ve always muddled through before.

And so did the stegosaurus, until it didn’t.