“If Adam Smith Were Alive Today, He’d be Spinning In His Grave”

SONY DSCThe title of today’s article is based on a quote from the recently departed Ralph Kiner, a member of baseball’s Hall of Fame, and a long time broadcaster for the New York Mets.    Mr. Kiner was knowledgeable.   He was  also entertaining, though often unintentionally.  Substitute “Branch Rickey” for “Adam Smith,” and you have one of the more famous Kinerisms. 

The Wall Street Journal (WSJ) published a story a short while ago about a mind boggling technological advance providing some stock traders with critical information a nano second ahead of the competition.  The latest chapter in the quest to reduce trading times to zero, involves laser beams mounted on roofs of buildings and towers in New Jersey,  linking the New York Stock Exchange with the NASDAQ trading center.

This story received just mild attention because the quest for warp speed trading has been proceeding at considerable speed itself since at least the late 1990s. Speed as a factor in trading is not new.  Adam Smith recognized the advantages of higher speed trading. As far back as the late 1700s, the most ingenious and best equipped traders used carrier pigeons to gain an edge.

High Speed Trading (HST), and its companion, Algorithmic Trading (AT)  — am going to abbreviate this as HST_AT — have received enormous attention.  Most of the attention has been around issues of fairness (how are the “little guys” in the market affected?); and stability (the potential for HST_AT to cause trading meltdowns). These are very important issues. But lost in most of the coverage are questions around the efficient and intelligent allocation of capital. 

Classic capitalism, or at least the version I was taught, starting with the “investment clubs” we joined in high school, stressed the intelligence and efficiency of free markets in channeling capital – directing it to the best ideas; the best (new) products;  the furtherance of high demand products and services; and rewarding businesses which are managed well; have already achieved a degree of success, and deserve a chance to grow.

This has always been the core appeal and reason for capitalism. This is how capitalism is contrasted with horribly inefficient methods of capital allocation, like Soviet Five Year Plans; or even (as many argue), European social-democrat, welfare states.  

SONY DSCEquity markets of course have never functioned in total accord with this ideal.  From the start, there has always been some form of “technical trading.”  That’s where investors look more to statistical patterns in stock prices to make trades, instead of looking to the underlying fundamentals of companies — the kind of information found in quarterly financial reports. The technical traders “progressed” to mathematical algorithms (much more complex than anything you learned in Stat 101).  HST, in turn, can be considered a type of algorithmic trading. 

Altogether, the intelligent allocation of capital seems to be an after thought, or a happy by-product (maybe) of HST_AT.  Anywhere from 50 to 70 percent of trading in equity markets is based on HST_AT.    And this doesn’t include the “small investor” using technical tools and rules of thumb furnished by Charles Schwab or Motley Fool, which are often short on financial and business fundamentals. In fairness to Schwab and Motley, they also give small investors some tools and information to conduct trades the classic way.

Before we jump to the conclusion that, in practice, hardly any investment is driven by conscious deliberation about the best ideas, products, services, and most effective companies, remember that a great deal of capital investment happens outside of equity markets.   A venture capitalist; a small business entrepreneur; or an existing business investing profits in new ventures, are not using mathematical algorithms or Cray computers (for the most part) to drive their decisions.  (Unfortunately, I don’t know what proportion of total capital allocation is accomplished via equity markets; and have not been able to find the answer).

The reminder that a lot of investment is still driven by classic concepts of capitalism, may be soothing; but we still don’t know how much better (or worse) capitalism might function if HST_AT were more highly regulated, or even banned, as Stanford, Nobel Laureate economist, Michael Spence,has proposed.

Even more worrisome – today, a lot of deliberate, “intelligent” capital allocation is channeled to high tech toys, like consumer shirt button cameras, which have a lot of entertainment value, but don’t add much to productivity or materially improve lives.  (I posted on this earlier).  Still, I am more worried about practices like instantaneous trading, which don’t appear to help anyone but the highest speed traders, than I am about the tiny cameras or instagram, which have value beyond being toys.



10 thoughts on ““If Adam Smith Were Alive Today, He’d be Spinning In His Grave”

  1. Kurt Lightfoot

    Irv, you’re touching on one of Dylan Ratigan’s themes. Do you follow him? He has his degree in economics and had his career in finance journalism. He’s blogging now, but burnt out. Hopefully he’s in just a cooling off period before he decides to commit to being an activist.

    He hates what has happened to capitalism over the past few decades, making it mostly a rigged game for the minority that is in control of writing/rewriting the rules and regulations in their favor. Ref. his book “Greedy Bastards: How We Can Stop Corporate Communists, Banksters, and Other Vampires from Sucking America Dry”. The book is a bit past its PR prime-time moment, and Ratigan has dropped out of the fight.

    Ratigan’s blog….

    Money is much better organized than people. I don’t expect people will get America back in my lifetime. But, hey, there’s always photography ;~{)



    1. Irv Lefberg Post author

      Yeah, Kurt, this is yet another example where Ds have missed the boat. At what point did capitalism become rigged, cronyistic, and out of touch with the real economy? Quite awhile ago. Why didn’t Ds seize on that, present it as monumentally at odds with true conservatism, as it is , instead of allowing the riggers and fiscal neo-cons to define the issue and then paint people like Liz Warren , Barney Frank, and for that matter, Paul Volcker, as commies. We know how– No guts or imagination, and being (also) enslaved by financial sector money. Oy vey


  2. Rosemary Ryan

    Irv, interesting post – that underscored for me how little I know about the stock market. My burning question is about the concept of free markets.

    In an economy that is dominated by a dwindling number of mega-corporations owned and run by a few hundred über wealthy titans who all know each other and communicate freely among themselves, do free markets really exist? Sure, I can shop Costco and Amazon and Best Buy, internet sellers and the local camera store for that state of the art DSLR camera I lust after, but the differences in the vendor prices are small. Isn’t it really Nikon and Canon and Sony who have decided how much I will pay for my new camera? And similarly, isn’t it the oil cartels who decide the price of gasoline (with individual stations playing with a few cents at the pump), or the handful of giant agribusinesses who decide the basic cost of food with the supermarket chains making tiny pricing adjusts to lure customers into their stores?

    Add to that the disparity in access to information about markets your post addresses, and it seems to me that most consumers are pawns in the markets, not players. What’s free about that?


  3. Irv Lefberg Post author

    Hi Rosemary, good and interesting observations. The points you emphasize are definitely related to the issues I raised in my post, but actually go back further to the concentration of wealth, trust (anti trust) and price fixing issues that are closely associated with Teddy Roosevelt and the Progressive movement, 100 or more years ago. My own sense is that markets became truly more free for awhile, but gradually reverted to where they were– or maybe worse in certain sectors– than in Teddy’s day. It’s always been a struggle to keep free markets free. And capitalists have always looked to government to write rules which favor some capitalists, at the expense of others. It’s a never ending struggle. Actually Nikon and Canon are getting lots of competition that results in lower prices for consumers, but the competition is not from traditional camera makers – rather from the iPad and iPhone makers and others inventing photo taking devices that rival the quality of canon and Nikon mass consumer market cameras. Bigger issue there might be where all those canons and nikons are being manufactured — not here. And thus, the sad state of affairs of the US worker. Now were into the issue of how free, free trade really is. 🙂 🙂 Oy vey


  4. Rosemary Ryan

    The impression I have from mass media is that most people think that free markets exist and in fact are the engines of economic growth. The right continually asserts that low taxes and deregulation are essential to allowing free markets to work and provide affluence to all. As you may assume, I don’t buy this argument, but have assumed that many economists do. Now I’m wondering what the orthodoxy is among economists. Are free markets regarded as an achievable reality, a theoretical ideal, a complete fantasy, or something else? Is the topic settled, highly debated, or???


  5. Irv Lefberg

    Wow. You really ask softball questions! Piece a cake. :). I think there has been (past tense) something approaching a consensus among mainstream economists up until recently — a lot of faith in free markets, a belief that markets were for the most part truly free, with willingness to moderately regulate them and fill in with moderate amount of government services where markets didn’t work; thus a consensus in favor of “mixed economies” , leaning more toward US version than Swedish version. As we speak, there is more recognition among the Center and Left that markets are a lot less free than we’ve been told: and that “free markets” are not resulting in broad prosperity (to say the least). Meanwhile, much of the Right has been frightened by this, dug in its heels, and defending capitalism in its current form more strongly than ever. Since (in my view) power in the media has shifted over the years from left to center-left to right, we are hearing more and more defense of free markets (in their current form) just when they are performing poorly. Just when we need a clear headed , non ideological discussion of the whole darn thing. What a mess!


    1. Rosemary Ryan

      Since that was too easy, how do we actually get to non-ideologically driven discussions about markets? I actually think we’ve had that discussion in some form or another on Facebook in your pre-blog days: about how even us common folk have segregated ourselves geographically along political lines and don’t talk to one another; about how objective media reporting is harder and harder to find in the sea of media that floods us all the time. My new pet theory that all the stuff we obsess about in the so-called news (Justin Beeber comes to mind first, followed by the 24/7 reporting on Bridgegate) is a planned diversion to keep us away from topics like the consolidation of wealth and power among a small elite, and wage stagnation for the rest of us. Will it be said that while the country was burning we were watching our flat screens?


  6. Rosemary Ryan

    The economists I tend to take note of (besides you, of course), are Simon Johnson and Joseph Stiglitz. Are there others you’d recommend?


    1. Irv Lefberg Post author

      Nice to see you on blog, my friend. Lots of the other posts have been easier. This instantaneous laser beam stock trading thing is really mindboggling, and, at most I get 70% of it. Good to hear from you.



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