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