18A018 Gekko by Jim Davies, 5/1/2018    


Oliver Stone has directed some fine movies, including the remarkable JFK, still the most credible account of how Kennedy was assassinated, as well as Platoon, Born on the Fourth of July, and The People vs Larry Flint. I look forward to seeing his latest, Snowden. But he is also responsible for making Wall Street, which is a very watchable movie on my shelf but is a scandalous caricature of capitalism of which he and Hollywood ought to be thoroughly ashamed. Stone therefore shows both the best and the worst side of modern "Liberalism"; commendable in opposing war and supporting freedom of speech, execrable in opposing free markets.

Wall Street features one Gordon Gekko (Michael Douglas) as the villain-in-chief; filthy rich, frenzied and ruthless in pursuit of wealth, careless of restrictive laws. He corrupts a struggling young stockbroker Bud Fox (Charlie Sheen) and the story tells of the latter's rise and fall. It was made in 1987, presumably as Hollywood's contribution to the Democrats' plan to unseat Reagan, and very nearly came unstuck; the most memorable phrase comes in a speech by Gekko in which he claims that "greed is good". The movie's clear intention is to show how Wall St capitalists have turned the moral code upside down; but audiences began to applaud the line, recognizing that Gekko was quite right; greed is indeed good, in that it's the motivational mainspring of all human progress.

Its caricature of capitalism is sick. While watching it again recently I noticed only two incidents that were morally reprehensible by the standard of self-ownership: firstly at one point in the story Gekko leads Fox to arrange to restructure an ailing airline and appoints him CEO, but then changes his mind and begins to sell off its parts as a "corporate raider" without telling Fox first; that is a double-cross, the breakage of an agreement. The second was that Gekko describes capitalist enterprise as a "zero sum game" with the great mass of people as losers. That shows Stone simply doesn't get it; the whole point of voluntary exchanges is that both win, because each party has his or her own subjective scale of values. That is exactly how wellbeing increases.

Two themes characterize Gekko's activity in the movie: buying failing firms and breaking them up for the profitable sale of their component parts, and insider trading. Stone portrays both as evil faces of capitalism; the first because it throws thousands out of work, the second because it gives "insiders" an unfair advantage on the stock market. He is completely wrong on both counts.

On the first matter, freedom to fail is essential in a healthy society. By that I mean that if an enterprise cannot return its owners a competitive profit, nothing should artificially prevent its liquidation. It will have some assets remaining, and those can be used in a better-managed firm; so a scavenging process needs to take place. The free market provides one; shares in any failing company will have fallen in price, so any capitalist with his eyes open can notice that, buy a controlling interest and then close the firm down, firing its directors and employees and selling off such useful assets as may remain - at a good profit. Those resources are therefore transferred to where they will be employed profitably, to everyone's benefit.

The alternative is for inefficient enterprises to stay in operation, making less and less money and tying up resources of labor and capital that could be better used elsewhere. This is precisely what government does. There is no part of government (that comes to mind) which could survive in a free competitive market; it would all fail miserably, without the force of law to keep it in place. And it would be true of regular firms, if they were forbidden to fail (eg by injecting taxpayer money to keep them afloat, as in the case of the USPS.)

The second big sin attributed to Gordon Gekko is that he digs up information available only to people with inside knowledge of a firm, and uses it to buy or sell its shares before the general public is made aware of those facts. A good example of this comes in a quite different movie, Aaron Russo's Trading Places (recommended!) in which an advance copy of the government's orange "crop report" is stolen, so that trading in OJ futures can take place before the report is published. In Wall Street, Fox snoops on the activities of a super-wealthy British investor so as to deduce he is about to buy control of a steel firm, and Gekko buys a block of shares which he then sells to the Brit at a highly inflated price.

The huge mistake made about such "insider trading" is that lawmakers don't understand what prices do. They function, in any market, to give signals. A rise tells all participants that demand is increasing for some reason, or that supply is shrinking. A fall conveys the opposite. Nobody needs to know the reason! The price change signal says something's up, and that's enough for action to be taken.

Now, if an "insider" - let's say, the CFO of a public company - finds that profits have slumped in the last quarter, he's in a position before that fact is announced to sell his own shares before the price falls steeply. He might even short-sell, and make a profit. But his action will itself give a heads-up to every other stock holder, even though they know nothing of his reasons, or even who he is. Some of them will take note and take action. Therefore the price fall, when it takes place after publication of the adverse report, will be less sudden than otherwise, less devastating to the bulk of shareholders.

By acting in his own interests on his inside information, therefore, the CFO brings benefit to a large number of other shareholders. That's not his purpose, but it is his effect.

But Uncle, proclaiming that he is doing good, prevents that happening by law, and punishes the CFO for his good deed... if it's noticed. And in the Wall Street story, Uncle's SEC men do notice what Gekko and Fox are doing, and Oliver Stone the "Liberal" commends them for being the good guys. Once again, his staggering ignorance of (or irrational enmity towards) free-market economics tells the tale exactly upside down.

Once government has been tossed into history's ashcan, its SEC will go with it and such absurdities will not be able to occur. The "invisible hand" of the market will wonderfully work, as Adam Smith noted, to turn the self-interest of the few into benefit for the many. I can hardly wait.

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