A Modest Proposal

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The
other day, I went to my friend Dick and showed him a proposal I
was working on. Dick happens to be a life-long Democrat, and as
the proposal forwarded a new plan for the government to help the
underprivileged, I was sure he would approve. Here’s the proposal
I showed him:

Today,
many corporations in our strong economy have been left behind
by the general prosperity. These may be old-industry stalwarts
who have not been able to gain the skills necessary for a smooth
transition to the electronic economy. Or, perhaps, they are new
companies, just getting going in industry, whose penny stocks
are undervalued by investors. Perhaps, through no fault of their
own, these companies have had a run of hard luck – the
CEO died
, a major customer went belly-up, or a new product
from a competitor rendered what they produce obsolete.
Many
employees, suppliers, investors and customers are relying on these
companies. Meanwhile, these businesses are suffering from a simple
lack of capital. If they had sufficient funding, they could invest
in new plants or modern technology and could then aid other players
in the economy by buying more of their goods, supplying them with
better products, or employing them at higher wages. Not only is
it compassionate to help out these companies, it will help the
economy as a whole by boosting purchasing power.
Therefore,
I forward a modest proposal. I recommend that the government set
a national minimum stock price. A reasonable first estimate of
where this should be set might be $10 per share. Once this law
is passed, it would be illegal to sell the stock of any company
for under this amount. (And of course, this is $10 per share for
the full number of currently outstanding shares – we can’t
have ruthless exploiters trying to skirt the law by forcing a
company to do a reverse split or buy back its own shares.)
The
effects of this law would be entirely salutary. No capitalization
need be taken from any other company to boost the capital of the
most-needy corporations. These corporations, now able to float
shares at least at this minimum price, will quickly become more
prosperous. The flow of funds to these enterprises will ripple
throughout the economy, spreading wealth all around.

“But
wait a second, Gene,” Dick said. “You’re not serious about this,
are you?”

“Yes,
quite serious,” I reply. “Why wouldn’t it be a good idea?”

“Well,
first of all, your point about ‘spreading wealth around’ is ridiculous.
If anyone is buying these stocks at the new minimum price, they
now have less money than they would have had at the old price –
in fact, exactly as much less as the company in question now has
more. So there is no ‘new wealth’ at all.”

“Hmm,
you may have a point there. I’ll have to try and work around that.
But do you see any other problems with my plan?”

“Of
course! You heard me say, ‘If anyone is buying these stocks at the
new minimum price…’ But why would they? If yesterday, I was only
willing to pay $5 for a share of Dotty Dotcom, why in the world
would I suddenly be willing to pay $10, just because some new law
is passed? I’ll still only pay what I think an item is worth!”

“So,
what do you think would happen to the shares of Dotty?”

“Well,
they would simply stop trading. Dotty, far from being able to raise
more capital, would no longer be able to raise any money at all.”

“You
have some good points there, Dick. But the funny thing is, I showed
my plan to a few CEOs, and they all loved it.”

“Were
these the CEOs of companies whose stocks were trading below $10
per share?”

“Well,
no, in fact, everyone of them has a stock trading above $10 per
share.”

“Then
of course they’d recommend it! They’re trying to cut off competition.
Since their shares are currently above $10, their stock will
continue to trade. In fact, without the competition of the lower
price stocks, demand for their stock will go up. They’re simply
trying to enrich themselves at the expense of the less fortunate.
They’re a bunch of scoundrels.”

“You
know, Dick, you’ve convinced me. My plan is stupid. Thanks.
But you’ve left me with one question.”

“Sure,
anything I can do to help.” Dick was feeling quite confident, having
thoroughly debunked my proposal.

“Since
you can see how stupid my plan is, why do you support raising the
minimum wage? In fact, why do you support having a minimum wage
at all? Aren’t low-wage workers exactly analogous to the low-priced
stocks I was describing? Aren’t employers equivalent to the investors
in my scenario, in that they will only pay the wages that particular
work is worth to them? And aren’t the labor unions, the main supporters
of minimum wage legislation, the same as the wealthy CEOs I described
to you, enriching themselves at the expense of the less fortunate?”

It
took me a while to revive Dick, but when he finally came to, he
claimed that he couldn’t remember a word of our conversation.

November
4, 2000

Gene
Callahan is a regular contributor to mises.org.

2000, Gene
Callahan

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