Destabilizing speculation

WALTER E. BLOCK: Angel of the Free Market


In the eyes of most economically illiterate speculators don’t bake bread; they do not provide drugs; they are AWOL when it comes to working in the workshop; they don’t teach math or cello. They are therefore pests for others who provide much needed daily goods and services.

Here is an actual quote from someone who really should know more about this matter: “These high frequency traders … are making huge sums of money, billions and billions of dollars, and doing nothing. no social value to the economy, “Len Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, said in an article for National Public Radio. “They’re just kind of the modern equivalent of crate skimming.”

According to John Kemp, market analyst at Reuters, “producers and consumers of commodities have long criticized ‘speculators’ for distorting prices that should be set by physical supply and demand. “

It will come like yesterday’s news that the speculator is perpetually under attack by the warriors of social justice. If Bernie Sanders hasn’t gone wild against this type of market activity yet, you can bet your boots are on his to-do list.

No, there is one and only one insurance against the variability of economic fortunes: the speculator.

Look at the seven fat years and then the seven lean years in Bible history. In the old days, supplies were large in relation to needs (stomach size) and therefore prices were relatively low. The secret of speculation? Buy low and sell high. Thus, during the first epoch, the years of plenty, the speculator buys commodities and has them set aside in barns and attics. It thus raises the price and reduces the more than adequate quantity available for consumption; thanks to its participation in the market, prices are now higher than they would otherwise have been and supplies (when not really needed) are reduced. This entrepreneur thus begins to reduce fluctuations in both price and quantity.

What happens next during the seven lean years? Now the crops have shriveled. The quantity available is low. The prices are high. People are now in desperate need of food. On which the speculator “takes advantage” of the situation and disgorges the grain he had saved. 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 reducing the differences in price and quantity. Prices are now lower than they would have been without his efforts, and quantities are greater, exactly when they are needed most. (He is categorically condemned by the economically illiterate for exploiting the poor who need food, by providing them with food, but that is a whole different matter.)

Thus, we see that if we want to be saved from “precariousness” (which not everyone wants), the free enterprise speculator is our guardian angel.

But suppose this worthy guesses wrong and buys high, selling low. So, will he not destabilize the markets by pushing up high prices, reducing low prices and doing the opposite with the quantities of goods? That is, won’t he disgorgement of food during the fat years, when it is hardly needed, and buy grain to store it during the lean years, when it is desperately needed?

Yes, indeed, he will act the exact opposite of the successful speculator we have just considered. But every time he does, he loses money and will have less wealth to keep doing it. If he makes one too many mistakes in his business activities, he will go bankrupt and become unable to increase swings again.

Since the free market thus punishes the inefficient spectator and rewards those who succeed who reduce wild swings, we can be sure that this institution will come to our rescue in this regard.

Of course, when the government speculates and does so too, all bets are off. It can continue on its way, destabilizing the markets, without suffering serious repercussions. All losses are covered by taxes, paid by hapless citizens.

Walter E. Block, Ph.D., Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University in New Orleans, was previously Professor and Chairman of the Department of Economics and Finance at the College of Business Administration of the University of Central Arkansas.


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