And now the Murphmeister misunderstands economics on Twatter

Glory be:

RichardJMurphy: RT @nils_gilman: Does the Modigliani-Miller theorem apply to black markets? ANSWER: No, it\’s never applied anywhere .
And that link is to here.
Where they discuss the way in which Somali pirate attacks are financed by syndicates. Stump up some of the cash necessary to get a raiding operation going, get a chunk of the rewards…..if there is indeed a ransom in the end.
Not unlike pirate style raiding was financed in our own dear land when we called them Letters of Marque and the like.
What that\’s got to do with Modigliani Miller I\’m not quite sure.
The basic theorem states that, under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed.
Anyone actually able to work out what Ritchie meant there? Maybe?
Quite apart from anything else, how does he get from a capital structure that we\’re not valuing (as there is as yet no transfer market in such pirate syndicates) to a disproof of a theory which talks about how capital structures change valuations….or don\’t?

3 thoughts on “And now the Murphmeister misunderstands economics on Twatter”

  1. Is anyone else thinking what I’m thinking?

    Open a fully fledged Somali pirate exchange, and let shipping companies hedge their risk by buying into the pirates.

  2. But even M&M decided that their own theory was wrong, because it failed to take account of tax planning.

    So debt finance makes the company more valuable because interest is tax deductible whereas in most countries dividends are not (so long as the debt levels are not so great that the company becomes a poor credit risk).

    But, as Tim says, what the hell this has to do with Somali pirate financing escapes me. But perhaps there’s a market here to set up a Tortuga-style stock exchange?

  3. A serious attempt to translate:

    1) I took economics at undergraduate level for a year at Southhampton Uni, I assert that the topic of my blog is economics, and some blog ranking sites take me at my word.

    2) As a recognised authority in economics (see above), it is within my competence to declare most of it to be utter rubbish; efficient markets, Laffer curves, just about all of it is ‘angels on a pinhead’ stuff that has no practical application. Except the bit where Keynes said tax and spend. And externalities where they justify tax and spend.

    3) Aha! M&M. another angel on a pinhead. See point 2 above. Not sure how it relates to the topic at hand, but it almost doesn’t matter, because the whole point is that it (economics) doesn’t actually relate to anything anyway.

    Written only slightly facetiously. I do think that is what he is getting at.

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