Is Insider Trading a Bad Thing?

Here is a very interesting article by economist Donald Boudreaux on why insider trading should not be illegal. Reading this argument made me think about all the things to which we have knee-jerk reactions, rather than considering evidence and arguments. It also raised in my mind the issue  that is so pervasive in our society, that it is somehow wrong/sinful for someone to make a lot of money. One reason the knee-jerk occurs is that we don’t want people to become prosperous; we covet their wealth and don’t want them to have it. Boudreaux argues, among other things, that their wealth gained on the basis of insider knowledge will, in the long run, actually make other people wealthier also (though certainly it will make some less wealthy in the short run).

Boudreaux gives a proposal for letting corporations police themselves in terms of what information can be traded upon and what cannot. He writes this thought-provoking comment, reminiscent of the first chapter of Money, Greed, and God (emphasis mine): “This decentralized competitive method for selecting information that is proprietary, and thus off-limits to inside traders, isn’t perfect. But the relevant comparison isn’t with an ideal, perfectly working world. The relevant comparison is with the existing approach: Government officials have decided that all insider trading is unlawful and that anyone accused of insider trading is subject to criminal prosecution. A less heavy-handed, less bureaucratic, less politicized, and more decentralized method for determining when inside information should, and when it shouldn’t, be traded on is preferable to Uncle Sam’s blanket proscription.”

SDG,
The Farmer

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2 responses to this post.

  1. Posted by sean c on October 28, 2009 at 8:35 am

    Kinda like ear marks. I read something saying that money is going to be spent regardless, so instead of having it appropriated in some back room with no public scrutiny, having it earmarked isn’t the worst thing in the world. Now, if that money could be not spent at all, it’s a different story. It’s the same knee jerk reaction possibly. You should have a knee jerk day where you highlight something that goes a little deeper than we all initially suspect.

    Reply

  2. Posted by That Liberal on October 28, 2009 at 1:07 pm

    Further objection to the concept of “fairness” that classical economists reject on principal. That is so weird. Anyway, what do you think the motivation is for those who “inside trade”?

    Reply

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