Wall Street

Watched Wall Street last night. What a terrible movie. Set in 1985, it features a young stock broker played by Charlie Sheen who gets in tight with a high-profile corporate raider, Gordon Gekko, played by Michael Douglas, through sheer persistence. Before you know it Gekko has Sheen out and about town like some kind of private eye gathering insider knowledge on companies so that the two of them can make a mint trading stocks -- aka insider trading.

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Sheen finally convinces Gekko to buy the company his blue-collar father works for -- an airline -- and turn it around. Gekko, however, decides to cut the company up and sell it off piecemeal, leaving the firm's employees high and dry. Along the way he delivers several silly diatribes including the famous statement that "greed is good."

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I was struck by just how clueless Hollywood, and Oliver Stone in particular, are about capitalism. While Gekko is portrated as a ruthless, incompassionate and basically soulless, the fact is that the buying and selling of companies by guys like Gekko is in large part what makes the U.S. economy work (You'll recall that Richard Gere's character in Pretty Woman has the same kind of job). Firms that lose money, rather than being protected, are sold off to other firms that can make better use of their assets. This is called a reallocation of resources. In countries such as Japan where firms are coddled and protected the economy stagnates are new jobs aren't created.

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This is all part of what economists refer to as the "seen and the unseen." We see the workers at the airline lose their jobs (although it is probably reasonable to assume many will get jobs with other airlines) but we don't see the new jobs that are created due to the re-shuffling (although one corporate type in the movie does say something about selling off the firm's hangars and building condos in their place, which sounds ridiculous -- how many people want to live next to an airport?) Indeed, it is no coincidence that this activity corresponds with an unemployment rate that steadily fell during the 1980s and through the 90s.

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Further, as for greed being good, while ineloquently phrased, it is in fact true. As Adam Smith said, "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest."

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Lastly, the movie make a good case for legalizing insider trading. When people on the inside engage in trading it releases information into the general market. For example, had insider trading been legal there is reason to think that Enron's stock would not have been as high as people on the inside -- who knew the company was a sham -- would have sold their stock. That selling of stock would have let other people know that something wasn't quite right there. For a more detailed explanation of why it should be legalized read this.