In Defense of the Speculator
Here’s a real-life quote from someone who really ought to know better about this matter. “These high-frequency traders … make enormous amounts of money, billions and billions of dollars, and do nothing of any social value for the economy,” said Len Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution. “They’re just kind of the modern-day equivalent of skimming pennies out of the till.”
In the view of John Kemp, a market analyst from Reuters, “[c]ommodity producers and consumers have long blamed ‘speculators for distorting prices that should be set by physical supply and demand.'”
It will come as yesterday’s news that the speculator is perennially under attack by the social justice warriors. If Bernie Sanders has not yet inveighed against this type of market activity, you can bet your boots that it is on his to-do list.
No, there is one and only one insurance against variability in economic fortunes: the speculator. Consider the seven fat years and then the seven lean years in the Bible story. In the former time period, supplies were great relative to need (stomach size), and prices were therefore relatively low. The secret to speculation? Buy low, and sell high. Thus, during the first epoch, the years of plenty, the speculator purchases foodstuffs and causes them to be set aside in barns and granaries. He thus raises the low price and reduces the more than adequate quantity available for consumption; thanks to his market participation, prices are now higher than otherwise would have been the case, and supplies (when they are not really that much needed) are lowered. This entrepreneur is thus starting to reduce the oscillations in both price and quantity.
What happens during the seven lean years, afterward? Now crops have shriveled. The quantity available is low. Prices are high. People are now desperate for food. At this point, the speculator “takes advantage” of the situation and disgorges the grain he had been saving up. By adding this extra supply, he now increases the low quantity available and reduces the high prices, continuing his profit-seeking activities. This has the happy effect of diminishing variances in price and quantity. Prices are now lower than they otherwise would have been but for his efforts, and quantities are greater, exactly when they are needed most. (He is roundly condemned by economic illiterates for exploiting the poor who are in need of food, by providing them with sustenance, but that is an entirely different matter.)
Thus, we see that if we are to be saved from “precariousness,” the free enterprise speculator is our guardian angel.
But suppose this worthy guesses wrong and buys high, selling low. Then will he not destabilize markets, raising high prices, reducing low ones and doing the opposite with quantities of goods? That is, will he not disgorge food during the fat years, when it is hardly needed, and purchase for storage grains in the lean years, when they are desperately needed? Yes, indeed, he will act in the exact opposite way of the successful speculator we have just considered. But every time he does so, he loses money, and he will have less wealth with which to continue to do so. If he errs in his commercial activities once too often, he will go bankrupt and become unable to increase oscillations again. From the fact that the free market punishes the ineffective spectator in this way, and rewards successful ones who reduce wild swings, we can rest assured that this institution will come to our rescue in this regard.
On the other hand, when the government speculates—and it also does so—all bets are off. It can continue its merry way, destabilizing markets, without undergoing any serious repercussions. Any and all losses are be defrayed with taxes, mulcted from hapless citizens.