Thursday, January 15, 2009

Objectivism & Economics, Part 16

Dishonesty, cheating, and theft. A recent study by the Josephson Institute found that 30% of today’s teenagers admit to having shop lifted in the last two year; that 42% said they lie for monetary gain; that 83% confessed to lying to a parent about a significant issue; and 64% admit to cheating in school over the past year. This sort of behavior is not, unfortunately, confined to teenagers, but afflicts all of society. In 2004, U.S. companies lost $4.7 billion to shop lifting and employee theft.

Corporate fraud remains a huge problem, despite the burdens imposed by the Sarbanes-Oxley regulations. Private equity firms, for example, aggressively buy up companies on the pretext of making these enterprises more efficient, yet statistics demonstrate that far more looting goes on than “value creation.” Subprime lending often was spearheaded by predatory mortgage brokers who made big promises to unsophisticated borrows only to charge immense fees and high interest rates further on down the road. Many of the financial instruments spawned by hedge funds have the whiff of fraud about them. Bad debt is mixed with good debt to create collateralized mortgage obligations (CMOs) which are then sold with triple A ratings, the good debt being used to conceal the bad debt. Then we have all the big news items in the corporate world: Enron, WorldCom, Madoff, etc. It doesn’t make for a particularly edifying spectacle.

Various explanations are given for the rise of dishonesty, cheating, and theft in America. Some blame it on secularization; some on the “greed” and “over-competiveness” of free enterprise; some on the decadence and demoralization caused by living in a wealthy society; some on the failure to discipline and instill self-control in young people. What do orthodox Objectivists blame it on? Consider Alex Epstein’s and Yaron Brook’s take on corporate scandals:
The common explanation that "greed" is to blame makes no sense--the abuses in companies like Enron and WorldCom were not exercises in self-interest, but in self-destruction. The shareholders of these companies lost huge amounts of money thanks to corporate mismanagement--mismanagement reflected by plummeting stock prices long before any scandals broke. Why did they tolerate incompetence for so long?
The reason lies in existing regulations that prevent shareholders from acting in their own interest. Anti-hostile-takeover legislation (passed in 1968 and reinforced by a myriad of state regulations) has made it difficult and costly for shareholders to replace incompetent management, thus allowing bad managers to get rich while driving companies into the ground, à la Enron. Arcane regulations passed in the 1930s limit the ability of the most knowledgeable shareholders to be involved in the board and therefore in decision-making. For example, financial entities, such as pension funds, insurance companies and mutual funds that own large stock positions in corporations, are either prohibited or strongly discouraged by law from board participation. Bankers who possess the financial resources and knowledge to take large positions in companies and promote rational corporate governance (as J. P. Morgan did at the turn of the century) are not allowed to do so.

As would be expected, Epstein and Brook blame government regulation. Is there any merit in their claim? No, not much. Several problems immediately come to mind. Note the dates of the regulations mentioned: the 1930s and 1968. Forty years ago in one instance, over seventy in the other. If these regulations are the prime culprits behind the rise of corporate fraud in recent years, why didn’t they lead to more fraud when they originally passed?

Be that as it may, it is unlikely that government regulations play a major role in shareholder power. The corporation, by dividing ownership into bits and pieces, creates institutional incentives that effectively empower management at the expense of ownership. As Schumpeter put it:
The capitalist process, by substituting a mere parcel of shares for the walls of and the machines in a factory, takes the life out of the idea of property. It loosens the grip that once was so strong—the grip in the sense of the legal right and the sense that the holder of the title loses the will to fight, economically, physically, politically, for “his” factory and his control over it, to die if necessary on its steps.

If you are simply one owner among hundreds, you’re not likely to go any great lengths to defend your “interests.” Indeed, you probably won’t even know about the incompetence of management until it’s too late. After all, that is normally what corporate fraud is all about: to conceal incompetence in management by “cooking” the books.

Brook and Epstein also complain of “complex and contradictory rules” which “encourage bad accounting.” But is that really what happened with Arthur Anderson and other accounting firms that are guilty of fraudulent accounting? Not according to insiders.
One reason for [the failure of accounting] is the well-known problem of conflict of interest [writes Richard Bookstaber, the well known hedge fund manager]. Accountants have a financial incentive to be on the company’s good side so they can keep their mandate. This conflict was the main reason for the erosion in the quality of financial reports over the course of the 1990s.

Brook and Epstein insist that “Rational managers have an incentive to provide accurate information to shareholders--it establishes their credibility and reputation and allows them to raise capital when needed.” This observation, however, misses the point. The problem is that, in contemporary financial markets, the risks are so great and the rewards so immense that it is possible for a manager to make huge amount of money at first only to lose huge amounts later on. Corporate fraud often arises from trading strategies that make huge amounts of money in the short run only to lose huge amounts in the long run. If a brokerage firm that has reputation for making enormous profits hides recent losses, how is anyone to know that the managers are incompetent? Their record seems to state otherwise; and until the fraud is exposed, they will continue to be seen as brilliant. It’s only after the fraud is exposed and investors have lost billions of dollars that the market punishes the fraud. Yet by then it’s too late.

Brook and Epstein conclude:
In an unfettered free market the desire for profit is satisfied by honest, long-range, rational behavior: by innovating, by hiring the best employees, by selling quality products and by providing accurate information to the owners of the corporation--shareholders. As for short-range managers, the markets will not tolerate them. As for the real swindlers, existing laws against force and fraud are sufficient to protect us.

The issue is not whether markets tolerate “short-range managers.” Markets do in fact tolerate such managers in the short-run—but that gives the managers plenty of time to inflict serious damage on financial markets. And when these same “markets” punish such short-term strategies, the greatest victims are never the managers, but the shareholders and investors. In the end, we have to reject the notion that markets, by themselves, will make people honest. Whatever the cause of the epidemic of cheating, dishonesty, and thievery that afflicts our society, such behavior places capitalism at risk. To paraphrase Edmund Burke: It is ordained in the eternal constitution of things, that men of dishonest minds cannot be free. Their mendacity forges their fetters.

12 comments:

Red Grant said...

___________________________________

The shareholders of these companies lost huge amounts of money thanks to corporate mismanagement--mismanagement reflected by

plummeting stock prices

long before any scandals broke. - Yaron and Epstein as quoted by Greg
___________________________________




This is such a BS notion.


If plummeting stock prices is the indication of corporate mismanagement, then

any company suffering stock price decline during bear market or recession should be denouned as having an corporate mismangement.


Stock prices go down or go up in the more or less short term primarily based on perception of the investors.



Btw. Generally stock prices decline a lot faster than when rising, therefore giving relatively little time for investors to unload their shares without accentuating price volatility, especially downward.

This is especially the case when shareholders try to dump a lot of share asap, as would be the case if the corporate mismangement happend to be culprit.



Yaron, considering he's running his investment consulting firm based on "Market Neutral Strategy",

is really being a sophist/fraud.

He's speaking two contradictory things out of his mouth.


Normally, market neutral strategy callls for buying stock perceived to be "undervalued" (which means, it has gone down quite a bit),

and

selling stocks perceived to "overvalued" (which means it has gone up quite a bit).


Now, Yaron's investment consulting firm, BH equity employes such a strategy.


Yaron Brook and Robert Hendershott founded BH Equity Research in 1998 to develop

market-neutral trading strategies

for institutional investors. At BH we source, analyze, execute, and monitor proprietary public and private equity investment strategies for select institutional clients. Our public strategy is based on our academic research in the banking industry. While we do participate in some direct private equity investments, our private equity strategy is primarily a fund-of-funds approach. We have made investment recommendations spanning the private equity market and are actively pursuing new fund relationships

http://www.bhequity.com/



Market neutral strategies are controversial because they tend to be highly leveraged, are inherently speculative, and are in conflict with the efficient market hypothesis.

http://www.riskglossary.com/link/market_neutral_strategy.htm


Efficient Market Hypothesis



Explained:

efficient market

efficient market hypothesis

Fama, Eugene

semi-strong efficiency

strong efficiency

weak efficiency





The efficient market hypothesis—like the random walk hypothesis it grew out of—is not so much a hypothesis as it is a model for how markets perform. As a model, it applies to some markets more than others.

A market is said to be efficient if prices in that market reflect all available information.

Suppose you hear that a firm has just announced quarterly earnings that exceed analysts' predictions. You rush to buy the stock but find its price has already risen two dollars from the previous day's close. Are you too late? Might the price continue to rise on the positive news, or has the market overreacted? Perhaps you should sell short instead of buying?

The efficient market hypothesis says these questions are mute—that whatever information you consider in making a decision has already been incorporated into prices and is useless for predicting future prices of the stock.

Market efficiency renders speculative trading pointless. We will elaborate on this shortly, but let's first consider some background

http://www.riskglossary.com/link/market_neutral_strategy.htm




___________________________________

The shareholders of these companies lost huge amounts of money thanks to corporate mismanagement--


mismanagement reflected by plummeting stock prices long before any scandals broke. - Yaron and Epstein as quoted by Greg
___________________________________



Did anyone notice?

Yaron and Epstein are saying market is efficient, yet Yaron is running an investment firm primarily based on

market inefficiency.


If the market is efficient, that the stock prices reflect everything about the investment worthiness of the stock,

then Yaron's investment approach

cannot work.


This mean either Yaron is knowingly lying about his commitment about Ayn Rand and free market capitalism,

and/or

he's a self-deluded sophist/fraud.


There's no other possibility.




___________________________________

Note the dates of the regulations mentioned: the 1930s and 1968. Forty years ago in one instance, over seventy in the other. If these regulations are the prime culprits behind the rise of corporate fraud in recent years, why didn’t they lead to more fraud when they originally passed? - Greg
___________________________________





Indeed. It would have been nice if Yaron and Epstein talked about the "bucket shops", "boiler room" frauds prevailent before those regulations.




___________________________________

Be that as it may, it is unlikely that government regulations play a major role in shareholder power. The corporation, by dividing ownership into bits and pieces, creates institutional incentives that effectively empower management at the expense of ownership. As Schumpeter put it:
The capitalist process, by substituting a mere parcel of shares for the walls of and the machines in a factory, takes the life out of the idea of property. It loosens the grip that once was so strong—the grip in the sense of the legal right and the sense that the holder of the title loses the will to fight, economically, physically, politically, for “his” factory and his control over it, to die if necessary on its steps.
If you are simply one owner among hundreds, you’re not likely to go any great lengths to defend your “interests.” Indeed, you probably won’t even know about the incompetence of management until it’s too late. After all, that is normally what corporate fraud is all about: to conceal incompetence in management by “cooking” the books. - Greg
___________________________________





Indeed. Just a thought.

What would you think if the shareholders themselves would be responsible for the debt in propotion to the percentage of the shared they have if the public corporation fails?

and the Upper Management would be paid the min wage but compensated in form of stocks distributed gradually in super short term, short term, medium term, long term, and super long term to discourage short term, irresponsible greed?




___________________________________

Be that as it may, it is unlikely that government regulations play a major role in shareholder power. The corporation, by dividing ownership into bits and pieces, creates institutional incentives that effectively empower management at the expense of ownership. As Schumpeter put it:
The capitalist process, by substituting a mere parcel of shares for the walls of and the machines in a factory, takes the life out of the idea of property. It loosens the grip that once was so strong—the grip in the sense of the legal right and the sense that the holder of the title loses the will to fight, economically, physically, politically, for “his” factory and his control over it, to die if necessary on its steps.
If you are simply one owner among hundreds, you’re not likely to go any great lengths to defend your “interests.” Indeed, you probably won’t even know about the incompetence of management until it’s too late. After all, that is normally what corporate fraud is all about: to conceal incompetence in management by “cooking” the books. - Greg
___________________________________


Indeed.


So what do you think should be the better solution?





___________________________________

Markets do in fact tolerate such managers in the short-run—but that gives the managers plenty of time to inflict serious damage on financial markets. And when these same “markets” punish such short-term strategies, the greatest victims are never the managers, but the shareholders and investors. In the end, we have to reject the notion that markets, by themselves, will make people honest. Whatever the cause of the epidemic of cheating, dishonesty, and thievery that afflicts our society, such behavior places capitalism at risk. - Greg
___________________________________





Indeed.

RottedOak said...

"Many of the financial instruments spawned by hedge funds have the whiff of fraud about them. Bad debt is mixed with good debt to create collateralized mortgage obligations (CMOs) which are then sold with triple A ratings, the good debt being used to conceal the bad debt."

This part of your post misconstrues the nature of CMOs and related financial instruments. They weren't "spawned by hedge funds," nor do they attempt to "conceal" bad debt by mixing it with good. There have been all sorts of real problems with these investments, so really there is no need to manufacture problems that they don't have.

There are tons of oversimplified explanations of the last decade's financial developments. Some of these are in support of anti-regulation agendas (like Brook and Epstein); more common these days are pro-regulation explanations that blame "deregulation". Unfortunately, most of the explanations are grossly one-sided and miss the fact that both public and private failings are involved.

Trying to analyze them all would be way beyond the scope of a comment, but here's one example: One reason banks invested so widely in these types of securities was to get good returns while meeting regulatory requirements for "safe" investments. The regulations clearly influenced their choices and probably kept them from questioning the ratings of these securities. But on the private side, the models used to give those "triple A," etc., ratings were amazingly naive about the housing market, perhaps willfully so. Without that, the investments would never have met the regulatory requirements and the banks would have needed to look elsewhere. In this narrow area, you could blame the regulations or the rating models, but the truth is that either by itself would have had a different effect in the absence of its interaction with the other.

Red Grant said...

___________________________________

Trying to analyze them all would be way beyond the scope of a comment, but here's one example: One reason banks invested so widely in these types of securities was to get good returns while meeting regulatory requirements for "safe" investments. The regulations clearly influenced their choices and probably kept them from questioning the ratings of these securities. But on the private side, the models used to give those "triple A," etc., ratings were amazingly naive about the housing market, perhaps willfully so. Without that, the investments would never have met the regulatory requirements and the banks would have needed to look elsewhere. In this narrow area, you could blame the regulations or the rating models, but the truth is that either by itself would have had a different effect in the absence of its interaction with the other. - Oak
___________________________________




I concur.

Anonymous said...

RottedOak is correct. CMOs were not "spawned by hedge funds." They were spawned only by investment banks until the Gramm-Leach-Bliley Act in 1999 authorized commercial banks to spawn them, too. Commercial banks and other mortgage lenders were participants all along, doing the mortgage lending that created the mortgages that went into the CMOs. The mortgage lenders were not very diligent about credit quality, because they didn't have to keep the mortgages on their books after they went to CMOs. Also, they were happy to keep making loans because the upfront fees and servicing fees made them profits. Of course, lenders were pressured by government to lend to meet the government's goal of higher home ownership.

gregnyquist said...

While I appreciate RottedOak pointing out that CMOs are not spawned by hedgefunds, the point of the post was not to suggest that they are, but that hedge funds have a whiff of fraud about them and that CMOs do tend to "conceal" (or render less transparent) bad debt with good. Now I'm aware that the stock rationalizations brought forth for hedge funds and CMOs can really seem quite compelling Nevertheless it's difficult to believe that any especially scrupulous person would have been comfortable with being a part of such financial legerdemain. Mixing bad with good debt so that partially toxic financial instruments can get triple A ratings? Using uncollaterized derivatives as insurance for risky investments? The fact that so much of this was done sincerely, in "good faith," only goes to prove the most dangerous frauds are those that take in the perpetrators of it.

As for whether regulations caused banks to come up with some of these dubious financial instruments, that only serves to substantiate the semi-fraudulent practices of such banks: they were trying to get around the regulations, so they could get greater returns (i.e., higher profits), despite the fact that many of their deposits are insured by the government. How many of these banks that are, in effect, using these ingenious financial instruments to evade banking regulations are saying: "We would gladly get rid the FDIC if in return we could do with our deposits as we pleased." No, that's not what they want at all: they want FDIC and deregulation, so they can keep their profits from risky investments and socialize their losses when their luck turns. Hardly a scrupulously honest way of conducting business, now is it?

RottedOak said...

Greg, when you talk about "Mixing bad with good debt so that partially toxic financial instruments can get triple A ratings," it sounds like your understanding of these securities comes from bad newspaper reporting. Some tranches of CMOs get high ratings because the securitization is structured to direct losses to lower-level tranches, which in turn get correspondingly lower ratings. This has relatively little to do with the quality of the underlying assets, whether they are "toxic" or not. There were serious problems with how CMOs were rated and how they were marked for accounting purposes. But this bit you keep repeating about mixing "good" and "bad" debt wasn't the issue. If you want a good overview of how mortgage securitization really works, I recommend the somewhat lengthy but nicely done explanations at Calculated Risk: http://www.calculatedriskblog.com/2007/07/compleat-ubernerd.html
More broadly, when you say, "The fact that so much of this was done sincerely, in 'good faith,' only goes to prove the most dangerous frauds are those that take in the perpetrators of it," that just doesn't make any sense to me. Fraud happens when someone knowingly promotes a falsehood to others. If they believe the falsehood themselves, then that's called a "mistake," or in severe cases a "delusion." Similarly, some vague feeling that you have about hedge funds being fraudulent doesn't make them fraudulent. It seems to me that you are trying to find "fraud" in the private sector even where it doesn't exist. That's really unnecessary, because there is plenty of real private fraud to work with. For example, I'm not trying in any way to defend the practices of mortgage lenders who misrepresented loans to borrowers. That sort of behavior warrants regulation, and deserves criminal prosecution when it can be proved. Nor would I try to defend Enron, Madoff, etc.

Regarding my comments on there being failings in both government and business, you say, "As for whether regulations caused banks to come up with some of these dubious financial instruments, that only serves to substantiate the semi-fraudulent practices of such banks: they were trying to get around the regulations, so they could get greater returns (i.e., higher profits), despite the fact that many of their deposits are insured by the government." What the banks did wasn't "trying to get around the regulations." They were following the regulations. Nothing in the law prohibits them from getting good returns just because some of their deposits are insured. Trying to get better returns within the restrictions of the regulations isn't fraud (or "semi-fraudulent," whatever that means). But the rules did inadvertently create incentives for the ratings agencies to give optimistic ratings, and disincentives for the banks to question those ratings. This raises all sorts of issues around unintended consequences, biases in human thinking, etc., but "fraud" has a minor role in this area, if any at all.

Finally, I have nothing good to say about the private profit/socialized risk model. I find it appalling. But I also don't see what it has to do with my criticisms of your post. I never said all businesses were "scrupulously honest," or anything like it. Just because I criticized some things you said doesn't make me some cartoon figure from the other side of a false dichotomy between "regulation good/business bad" and "regulation bad/business good."

gregnyquist said...

RottedOak, I suspect the crux of our difference comes down to your rejection that anything can be "semi-fraudulent." "Fraud happens when someone knowingly promotes a falsehood to others," you write. This implies that something is either fraudulent or not fraudulent. There is no gray area or middle ground: it's either one or the other. I regard this view as naive. It is precisely the gray areas that cause so many of the problems confronting markets, because they're very difficult to efficiently regulate. Take these CMOs. On the surface they appear perfectly sound. Rather than "mixing" bad debt and good debt, they merely comparmentalize debt in order to offer just the right mixture of yields and safety. At first glance, CMOs seem like just the sort of innovation that capitlism does best. An academic study even concluded that, by the 1990s, these instruments saved homeowners $17 million. However, even if initially these CMOs seemed like a financial innovation at its best, there were some serious things wrong with them. They were never, even in the earliest stages, all that transparent. Modeling for the payouts of the simplist three tranche CMOs took a mainframe computer an entire weekend to grind out. By the 1990s, Sun workstations were creating ultra-complex 125 tranche instruments that no one could possibly understand. Now this complexity, whether one likes it or not, conceals risk and increases undetected exposure. And I would contend that is not entirely honest to deal in instruments that are so opaque.

Of course, it can be argued that, as there is no "intentional" or conscious honesty, the "not entirely honest" label is a misnomer. People are either dishonest or mistaken (or, in worst cases, "deluded"). But again, I believe there is a gray area. If an individual's "mistakes" occur as a result of a kind of cognitive negligence or under the unconsious promptings of a vested interest, is he really being entirely honest? Is an experienced trader who tries to make up some recent losses by taking greater risks (risks he would never have taken if he hadn't been stung by his recent losses) conducting himself with spotless integrity? I don't think so. But even after he's lost his firm hundreds of millions of dollars, it would be extremely difficult to convict him for fraud, even if he was specifically instructed not to take "greater" risks. Since the risks traders are involved are usually of the incalcuable type, there is no sure-fire way of ascertaining what a given risk precisely is. It is all based on a judgment call and you can't convict someone for what may have only been a spell of bad judgment. Yet a more honest trader (with equivalent experience) would probably not have engaged in those trades. So there really is a gray area between delusion, poor judgment and incompetence on the one side and honesty on the other.

RottedOak said...

"I suspect the crux of our difference comes down to your rejection that anything can be 'semi-fraudulent.'"

I didn't reject the idea of something being "semi-fraudulent." I indicated that I didn't know what it meant. Frankly, your explanation is such that I'm still not sure. You talk about a "gray area" between mistakes "on the one side" and "honesty on the other." But honest/dishonest and mistaken/correct are different categories, so there is no inherent opposition between them. If a huckster tries to sell me an old chair as an antique, thinking that it is a modern reproduction, then he is dishonest. If it turns out that it really is an antique, then he is also mistaken, but still dishonest. Now, I'm not saying there can't be gray areas regarding our knowledge. In practical cases, a dishonest person may portray themselves as honest but mistaken in order to create confusion. But you seem to embrace that confusion as an element of moral theory, which strikes me as unhelpful.

If I had to name the primary character flaw that led to the current crisis, I would call it "hubris," not "dishonesty." Hubris can be quite sincere and still utterly mistaken. One fact above all supports the hubris explanation: many of the institutions suffering from the failings of CMOs and related instruments are the same institutions that issued them. Despite your suggestion of fraudsters being taken in by their own frauds, true frauds don't typically invest in their own fraudulent schemes. They certainly don't do so on a massive scale. But those afflicted with hubris are apt to do exactly that.

Whether it is hubris, incompetence, or whatever, describing any of these as "semi-fraudulent" looks like an attempt to place the actions of some people into a particular moral category that is especially odious. If the people who issued CMOs are (semi-)fraudsters, then they are criminals, in narrative if not in law. And everyone else involved become their victims. Our problems are neatly contained to a familiar paradigm with a familiar solution. Punish the bad people and watch them closely in the future, and all will be well. Unfortunately, I don't buy that portrayal. The real problems are much broader and a lot harder to address.

Andrei Mincov said...

It is intellectually dishonest to reduce the Objectivists' view of the reasons for corporate fraud to regulations.

There are at least two other reasons, fully compatible with Objectivist philosophy that are substantially more important than regulations.

1. Government's total failure to exercise its proper role in establishing an efficient court system. A system where more than 95% of the crystallized disputes get settled because it is too time-consuming and too costly for the parties to establish who is right and who is wrong, is an incredibly inefficient system that is meant to discourage litigation. This is exactly the type of environment that encourages fraud. Because the chances to get away with it are extremely high.

2. Looting through taxation. Tax code creates innumerable loopholes for corporations which are unavailable to individuals. How many corporate entities were established to reduce the tax load? The auditors' reports had to fulfill two mutually exclusive tasks: to show enough revenue to portray a successful company without drawing the looting through taxation.

3. (Bonus). If not for the inflation induced by the government and not for tax incentives, substantially less people would invest their money in questionable transactions. Today every layman knows that if their money is not generating money it is being devalued, so one is all but forced to bring that money to the bank for it to be invested. Imagine a world without tax-free savings accounts and all of that nonsense. Imagine a world where every penny that you earn is yours, for you to spend how you please. Imagine a world where government does not print money. How many people would risk giving their money to a stranger expecting return? Entrepreneurs would, but would the number of "investors" be as high? I doubt it.

gregnyquist said...

"It is intellectually dishonest to reduce the Objectivists' view of the reasons for corporate fraud to regulations."

Since that is what Yaron Brook and Alex Epstein do in their editorial, this is tantamount to accusing these two gentlemen of intellectual dishonesty. Even I, as a critic of Objectivism, would not go this far.

"[The court system] is an incredibly inefficient system that is meant to discourage litigation."

Given all the frivilous lawsuits which daily barage our civil courts, that is not a very plausible assertion. 95% of suits get settled, in part, because of the complexity of the judicial process, which make such suits very costly to both sides in the litigation. This complexity is inherent in the very process of adjudication: it could not be removed without giving judges a great deal more arbitrary power than they already have, thereby further compromising the due process rights of the citizenry.

"How many corporate entities were established to reduce the tax load?"

Corporate entities mainly established to reduce tax load are rarely significant. Most big corporations were established to take advantage of limited liability, so that capitalists and entrepreneurs can do business without risking everything they own in the process.

Andrei Mincov said...

Since that is what Yaron Brook and Alex Epstein do in their editorial, this is tantamount to accusing these two gentlemen of intellectual dishonesty. Even I, as a critic of Objectivism, would not go this far.

Oh yes, sorry, I forgot you don't believe in logic. Since when is "A is" means "A, and only A, is"?

Given all the frivilous lawsuits which daily barage our civil courts, that is not a very plausible assertion. 95% of suits get settled, in part, because of the complexity of the judicial process, which make such suits very costly to both sides in the litigation. This complexity is inherent in the very process of adjudication: it could not be removed without giving judges a great deal more arbitrary power than they already have, thereby further compromising the due process rights of the citizenry.

And how does this disprove my point that the government spectacularly failed in creating an efficient judiciary?

Corporate entities mainly established to reduce tax load are rarely significant. Most big corporations were established to take advantage of limited liability, so that capitalists and entrepreneurs can do business without risking everything they own in the process.

Oh really? You have evidence to support it? And further, you have evidence to back up the idea that limited liability caused any noticeably harm?

Xtra Laj said...

Greg wrote:

Corporate entities mainly established to reduce tax load are rarely significant. Most big corporations were established to take advantage of limited liability, so that capitalists and entrepreneurs can do business without risking everything they own in the process.

In fact, since anyone who has a business background knows that the major advantage of a corporation is limited liability and the major disadvantage of a corporation is double taxation, this is almost a tautology.

Unable to resist responding in Pavlovian, kneejerk fashion, Andrei Mincov, also in typically rationalist Objectivist fashion, wrote:

Oh really? You have evidence to support it? And further, you have evidence to back up the idea that limited liability caused any noticeably harm?

Now, while the role of limited liability in particular and the corporate structure in general in encouraging risk-taking is popular knowledge (in fact, limitied liability is the model of a call option, one of the riskier investments), and while Greg did not discuss the role of limited liability in any of this, we hear Andrei, rather than taking a moment to think through issues raised in Greg's response and writing a clear reply, rushing to ask questions that betray his ideological mindset which doesn't even strive to understand the position he is debating against.

Isn't Google available for people who don't have basic business education anymore?