Category Archives: Free Markets

Why Do we Have Academic Tenure?

In American universities, there is a system of tenure for professors. It may be difficult for young professors to earn their tenure, but once they get it, they cannot be fired. Normally, an enterprise wants to hire employees when it has opportunities and revenue growth, and fire employees who lose their motivation, become careless, don’t grow their knowledge, or when the market changes. Tenure works adversely to this universal need to remain profitable. Why would anyone support it?

The theory is that tenure protects a professor’s academic freedom. A tenured professor cannot be fired except for just cause, so he is free to disagree with prevailing opinion. It’s an interesting theory, but how is it working out in practice?

Fact is, in many academic fields the exact opposite is occurring. All too often, there is a stifling monoculture, in which the politically correct view rules utterly. Some fields could almost be described as being locked in stasis. For example, in economics departments in prestigious universities, they may criticize this Fed decision or that policy, but who dares to write against the orthodoxy of central banking and legal tender laws? Or in climate science, for a long time there was a manufactured consensus, enforced by numerous means. There are many other disciplines in which political correctness does not permit dissenting opinions.

In any case, tenure may seem like a great idea to academics. It’s tempting to seek a blank check, such as a promise of job security for life. There is a reason why it does not exist in the more competitive world of corporate employment. Customers in the markets do not make promises to continue to buy the products of a particular company for the indefinite future. They continually reevaluate their purchasing decisions based on price, quality, and changing market conditions.

With their customers giving them no guarantees of future revenues, competitive companies are in no position to give wage guarantees to their employees. Every day, a company must earn its customers, and therefore every day its employees must earn their paychecks.

Tenure is an attempt to short-circuit these market mechanisms. Perhaps a corporate employee may become lazy, allow his skills to grow stale, become less motivated, or for any other reason no longer contribute to the profitability of the company. No corporation therefore can offer tenure as a general policy.

This stark difference between corporations and universities is a damning indictment of the lack of competitiveness of the university system. And what is competitiveness? It is an enterprise’s responsiveness to the demands of its customers, including products offered, quality, price, service, and all other things that affect the offer to the customer.

The price of a conventional university education has been skyrocketing for a long time. The result is that many students are obliged to go so deeply into debt to pay for school that they cannot hope to attain a good return on investment with the salaries they are likely to obtain upon graduation. Without even counting the degraded quality of courses in subjects where political correctness rules, many universities are sluggish to respond to changing technology with updated course offerings.

Tenure is an attempt to make promises to professors outside the market.

So, if the tenure system does not allow professors to say what they think, what force can affect them, despite the protections of tenure? The greatest pressure on academics to roll over for political correctness is government funding. Some professors get funding and some do not. Even if a scholar retains his integrity under this pressure, the lack of funding will slow down or interrupt his work and reduce his ability to be heard. For example, a lack of funding may make it more difficult to get published, and certainly cuts down on travel to present at conferences. There is no such thing as government paid research without government controlled research.

Tenure utterly fails to deliver what it promises. Professors are forced to toe the line.

Genuine advocates of academic freedom, who want diversity of opinion, ought to demand an end to tenure along with government funding of education and grants.

The SEC Attacks SAC Capital

The Securities and Exchange Commission is building a case against Steven Cohen and his firm SAC. What did SAC do wrong? According to the SEC, they insider-traded. What does that mean? Insider trading is when someone trades with knowledge they have but which others do not. The question is whether this should be a crime.

It’s telling, that if you trade based on proprietary knowledge, you are now charged with fraud. How do we get from trading to fraud? The above article offers no explanation. We have to look elsewhere, to someone who understood the issue.

George Orwell used thought control as a major theme in his novel 1984. He realized that if a dictator can control the language people use, then he controls the very thoughts that people can have. This theme was also prominent in Ayn Rand’s Anthem.

The average person does not understand the stock market, much less securities regulation. But he understands fraud. Fraudsters are very dangerous criminals, because they can hide unnoticed while abusing the trust of a large number of victims. Who wouldn’t want fraudsters to go to jail?

The key idea in fraud is deception. The fraudster lies to his victim, in order to get take victim’s money. Even if you think that insider trading is bad, can you really say with a straight face that it is an act of deception?

In the case of SAC, the article describes the two juiciest criminal cases so far. One is against Michael Steinberg. He allegedly traded Dell and Nvidia stock, based on tips from an analyst. Another is against Matthew Martoma. He allegedly got information from doctors involved in clinical drug trials to trade Elan and Wyeth.

This isn’t fraud. Why do so many people support outlawing it, then? I think it is because of what they think the purpose of the market is—what it should achieve above all else. Egalitarianism.

Many people today think that the market is (or should be) a random and chaotic casino. This view holds that it’s good for everyone when stock prices are rising, as they have been since 2009. And conversely, it’s bad for everyone when stock prices fall, as they did in 2008. Not coincidentally, this is one reason why people who should know better support the Fed. They think that a central bank can engineer a steady rise in stock prices.

The idea that someone might make money when others are not, well, that’s tantamount to a thief taking money from his victim!  It goes against what many people feel is the primary purpose of the stock market—the reason why it exists—to let everyone make money together.

It’s obvious, once this view is stated openly, that the whole premise is wrong. The stock market has an economic purpose. Like all valid economic purposes, it’s served when people are free to make and lose money, and thwarted when people are artificially barred from winning or losing. The purpose has been mostly lost, so let’s state it explicitly.

The stock market exists to allocate capital into the hands of those who are producing wealth. By its nature, this necessarily means de-allocating capital out of the hands of those who are destroying wealth.

This is no mere intellectual abstraction. When a wealth-producing company is starved for capital, no one wins. We are all made a little less wealthy. When a wealth destroying company is handed capital it doesn’t deserve, such a company destroys the wealth, and impoverishes everyone.

If insiders, outsiders, upsiders, or downsiders help allocate capital away from wealth-destroying, and towards wealth-producing, companies, they deserve their profits and we should all thank them. We should not envy them their gains or seek to punish them.

Everyone has a rational self-interest in proper capital allocation. Especially those who eat, surf the Internet, or fly in airplanes. And especially those who hope to live long enough for life-extending technology, space travel, and 3D holographic TV.