“The answer seems obvious: whatever someone is willing to pay for it, of course. But, it’s not as simple as that,” says Sean Corrigan. Read the article.
Source link: http://blog.mises.org/3825/what-is-a-stock-worth/
What Is a Stock ‘Worth’?
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I haven’t read up on the Austrian interpretation of the stock market, but as a libertarian (for moral not economic reasons) I always thought the market as it exists now doesn’t look like it would if things were unregulated. For instance, currently banned activities like ‘insider trading’, which just means someone has better information than you. I read the above article, which is interesting but doesn’t touch on how the stock market might differ in a true free market. Are there any articles that discuss this issue?
I’d love to see an article on what the unregulated free stock market would look like!
A comment on insider trading: it’s not supposed to be a prohibition on trading when you “know more”; it’s supposed to be a prohibition on trading based on your own secret actions (and by extension the actions of your company). So deciding to have the company issue a massive amount of stock, then selling short before the release is announced is considered insider trading.
Of course, what these regulations are supposed to do and what they really do are two different questions. I’d love to see a thoughtful analysis from one of the great thinkers on this (or, as you said, on how the market would handle these things unaided). Another related topic: how would law apply to stock ownership? As you probably know, the entire theory of a class “C” corporation is to shield the owners from liability for the corporation’s actions, and because of this many legal requirements are placed on those corporations. Is that just? What if it weren’t true? The libertarian candidate for president in 2004 believed that this liability screen should be eliminated; he felt that stockholders should be able to be sued as a class for the corporation’s errors, and as a result stockholders would want to buy insurance, and in turn the insurance companies would use the owner’s authority to regulate the company.
-Billy
I find it amusing that, on this blog in particular, you have people who are wishing for an “article on what the unregulated free stock market would look like!”
Maybe next we can ask Hillary Clinton what her “free” health care model will look like in practice…
John
John,
I’m merely interested in reading from someone who is well versed in such economic matters, as to give a coherent view of what an unregulated stock market might look like – what is likely to occur if things like insider trading are not punished, and (as Bill mentioned) if corporations did not receive special legal status. Would stocks still be a popular investment option – or would companies offer something like a stock but different in some way? Why is this a funny request? Is it because you think the answers will all describe rosey situations, where everyone is better off? Personally, I am not swayed by consequentialist arguments – if deregulating the stock market leads to a short-term crash and many people lose value, then that merely means it had been overvalued due to unjustified government intervention. What interests me is how the stock market might look in a free market, not doomsday (or utopian) scenarios of what moving from a regulated to unregulated market would do. If you have the expertise to offer, I’d honestly be interested in reading what you write.
Simon P,
A good question. I think the stock market would look fairly different on a really free market. Among various differences, there would be no “limited liability” for corporations. While it would be possible for some corporations to issue “limited liability” stock, ultimately, someone would have to assume complete liability. That is, if I’m an original owner of a company, I can issue limited liability stock (to help raise more capital), but then I must assume ultimate liability. Prof. Murphy has written about this in an article titled Limited Liability Corporations in a Free Society.
In that vein, William Tanksley has some interesting comments above. In the event that a company does not issue limited-liability stocks, it would most likely be prudent for investors to purchase insurance against possible corporate liability.
It is also likely that the market for corporate control would function more efficiently, absent State-regulations. Summarily, what happens now is that once bids for take-over reach a certain percentage of ownership, the bidder has to make a public announcement informing the current (inefficient) managers, who then do whatever they can to avoid the takeover. In a free market, this wouldn’t occur. The LvMI has numerous articles discussing corporate control, particularly: Padilla, Alexandre. Insider Trading, Agency Problems, and the Separation of Property and Control and Can Agency Theory Justify the Regulation of Insider Trading? Padilla argues that while insider trading wouldn’t be banned by law in a free market, not all corporations would allow it.
Among other changes, there would not be requirements that companies go public once reaching a certain size, for example. There wouldn’t be the strangling top-ordered accounting requirements; rather, there would be voluntary standards that could be held to, and most likely competing ones, which would produce a drive towards the best accounting standards, not those the most lobbied for. Individuals could choose to only invest in companies that made disclosures on par with the accounting standards they select; or they could, alternatively, even choose not to require these standards as a pre-requisite to investing.
I hope this post has been helpful.
Very helpful, David — good extra reading material. I agree with you that accounting standards would be efficiently enforced by investors, especially by ones using private insurance companies (as I mentioned, one would expect the companies to act as partial proxies for all of their insured stockholders with respect to risk transperancy).
I’m not so sure about eliminating limited liability. I want to see more thought on it. If it were a government regulation I’d be entirely for eliminating it; but it seems to be just a random provision in civil law, and as such I wouldn’t want to touch it without a wholesale reorganization of the rest of the law as well.
-Billy
If you look at the commodity markets such as the Chicago Board Of Trade and the Chicago Mercantile Exchange, Market Makers and Clearing Houses all have to be set up as non-limited liability entities. Also, there are no regulations against insider trading. Hormel Meat Company and the farmer looking at his soy bean crop in the field are perfectly entitled to use any information that they know to trade to their advantage in their respective markets. Indeed, the market is has historically been defined as being composed of hedgers (professionals) and speculators. Several academic studies have concluded that in the absence of commodity futures and forward markets, commodity prices would be more expensive to the consumer.
Limited liability is something largely created by State intervention in the free market. In Limited Liability and the Right of Contract, Gary North argues for limited liability. His reasoning is essentially as follows:
I agree with his argument in part, but not all. I agree with the right to contract such that the risk of default is not placed on the party it would normally be placed on (absent such a stipulation). Regarding his comment about not being able to deny the legitimacy of enslavement for debt without becoming a defender of limited liability, so what? Bankruptcy laws are an enormous fraud, and if someone defaults on a debt-obligation, they should face a period of temporary servitude (or wage-garnishing, etc) to make up for their debts.
Furthermore, Gary North’s defense of limited liability leaves out an important consideration: the case of a third party with which the company did not contract, but who was harmed by the company (by that, I mean criminally harmed). Why should incorporation grant limited liability on the murder of someone, for example? Even if it’s not something like murder, and something less intentional (like, say, causing deaths via negligence in waste disposal), there’s no reason why there should be “limited liability”. Someone has to be liable; someone has to bear the risk.
Mr. North argues that contracting parties can define who bears the risk — the liability — of a default in their dealings. All fair and well, there’s nothing wrong with this. However, this argument doesn’t in any way apply to non-voluntary interactions, where a non-consenting party is harmed (and I mean here something prosecuteable under natural law) by a corporation.
Another problem with Mr. North’s argument is that some of those dealing with a corporation (Inc. or Ltd.) may not know that they’re doing such.
David,
Thank you for those links. I have to say that reading over the Padilla pdf (but not studying it in great detail as it probably deserves) leaves me unconvinced that insider trading could be reliably controlled by the corporation – at least not if an employee is able to maintain monetary privacy. Granted the bigwigs who have millions of shares and deal in that amount would get noticed, but the average worker who hears about non-public information and buys a couple hundred/thousand shares based on that, would most likely slip under the radar. Multiply those small individual actions and you get a macroscopic effect on the stock market. Again, I’m not saying that’s an argument for government regulation, since the consequence of rampant insider trading just may be less short-term speculative trading. But thanks again for the links.
Hi David Heinrich: Is the issue you have with limited liability its abuse beyond protecting individuals pooling their capital such that their personal funds are not liable for debts of the company?
I noticed Rothbard’s comment in MES regarding this: “It is true that limited liability for torts is the illegitimate conferring of a special privilege, but this does not loom large among the total liabilities of any corporation.”
I’d like to take this opportunity to (almost) completely recant my criticism of limited liability, as it apparently currently exists. As Stephan Kinsella notes:
So, there it is, I was ignorant on the matter of limited corporate liability.
The one remaining concern I have is when individuals don’t know they’re dealing with a corporation; but, presumeably, limited liability is lost when attempts to concel LLC / Inc are made. The question is, then, who incurs that liability? Presumeably the agent of the corporation who engaged in such concealment.
Paul,
I’m not so sure insider trading is a bad thing. It causes a company’s shares to be more fairly (correctly) valued.
Hi David. I’m with you. In fact i’m sure insider trading is a good thing. It means more knowledgeable traders all round!
Paul,
The one area where it might be bad is where senior managers try to create alot of volatility to capitalize on price-swings. But that’s where the market for corporate control and other forces (such as their desire for long-term employment) can deal with agency problems. Less important employees wouldn’t be able to create volatility by their indidvidual actions within the corporation.
David:
Within the context we are talking about “limited liability” can take on two distinct meanings.
In the first context we can say that as a business entity such as a C-Corporation is a limited liability entity. In this context the shareholders do not own the corporation’s assets. The corporation is a separate legal entity from the shareholders. It is the shareholders who enjoy the limited liability, not the corporation. In the event of liability for negligence, for asbestosis for instance, the Johns-Manville Corporation and its insurers, Lloyds of London were subject to unlimited liability (this liquidated the corporation and bankrupted the “names” (Lloyd’s investors who had agreed to pledge their own personal assets). On the other hand, the Johns-Manville shareholders were limited in their liability and only lost the value of their shares.
In the second context of limited liability, if United Airlines loses your luggage containing your two Armani suits, your Gucci shoes, your video camera and your laptop computer, you don’t get to sue them for $6,000. Instead you will be offered a ridiculously low settlement. This type of “limited liability” is iniquitous. (Needless to say, this “right to swindle” is conferred on the airlines by federal regulation! Even worse, if they find your luggage after they have paid your settlement, they get to keep it!)
In my opinion the first context is legitimate – without limited liability, people would only invest in companies over which they had some form of control.
The second context of limited liability is a rip off.
It seems that, in a free market, you could have both Limited and Unlimited liability debts and institutions.
For instance, with a credit card: American Express (for example) could issue two separate cards: One with unlimited liability, and one that provides a default clause. Naturally, the second would have a higher interest rate than the first to make up for th added risk undertaken by Amex. However, the second might be more popular despite the higher interest rate, because of the possibility of default.
Maybe I’m oversimplifying or not understanding the issue entirely, but with a corporation it seems the same would be true. LLC’s and unlimited liability corporations could exist side-by-side. Investors would need to be more careful in dealing with unlimited liability corporations, but these corporations would enjoy lower rates from creditors. Perhaps the limited-liability nature of a LLC would attract more investors and thus, more net capital, in spite of the higher liability rates.
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