In Defense of Speculation

Like "neoliberalism", speculation is a concept people feel comfortable decrying before they’ve quite understood it. Used by government and opposition alike as a term of abuse, the whole notion that speculation plays a constructive – indeed vital – role in the economic life of society seems alien, almost willfully obtuse to people. And yet, if you stop to unpack the term, you start to realize that speculation isn’t just normal and rational, it’s actually a prerequisite to a sane economic order. Trying to ban speculation is, in effect, trying to ban intelligence.

To see why, you need to come on a little thought experiment with me:

Say that, last year, the country produced 100,000 widgets. They sold at Bs.1 each, and the country’s demand for the year was satisfied. This year, just 50,000  widgets are being produced. The government dictates you can’t raise the price of widgets. It’s the end of March and, already, half the widget stock for the year’s gone.

Now, say you’re a widget dealer…what do you do?

Lets be clear, you had no hand in generating the widget shortage. Your work is in the distribution chain, not in production. You face the relative shortage as a fait accompli: a problem that landed on your lap through no fault of your own. And yet, you have a decision to make.

You could just keep selling at the government-set price, and let your stock run out by June. In fact, as June approaches and stocks visibly dwindle, nervous buyers would probably stock up ahead of looming shortages, clearing out your inventory in a hurry. This would leave you unable to sell anything in the second half of the year, probably putting you out of business, and doing no service at all to the wider economy, which would be unable to find widgets at any price by July.

You might think that, this way, you at least protect yourself from retaliatory action from the state, but it’s a vain hope. Around September, an INDEPABIS Commissioner would probably pop around to your shop, see that you weren’t selling any widgets, acuse you of hoarding and shut you down. 

Your other option is to look ahead. To examine your present circumstances and make an inference about the future based on inconclusive evidence. You could, in other words, speculate. "Hmmmm," you might think to yourself, "at the current rate of consumption, my stock is going to last just half as long as I need it to last. What conjecture can I formulate about the future on the basis of that?" 

One possible outcome of such a speculative process would be to think "carrizo, come September, people are probably going to be willing to pay well  over Bs.1 for a widget. If only there was some way I could find to still have widgets to sell when that time comes…"

The seeds of a thought have been planted in your brain.

Unless you’re an idiot, your course of action is clear: you will exit the market now in order to re-enter it, at a higher price, in September. In doing so, you’re performing an economic service to the community: you’re smoothing the supply of widgets over the period in question, ensuring they’re available for sale not just now but in the future as well. Both widget sellers and widget buyers benefit from this application of foresight, which is what we’re really talking about when we talk about "speculation."

Now, guess what happens if every widget seller in the market follows the same speculative process, exits the market, and waits to supply widgets in the second half of the year. Suddenly, widgets aren’t available for sale now. Suddenly, people are willing to pay more for widgets now.

Again, how does a rational seller react? He will soon come to see that there must, logically, be a price that’s higher than the government set price but lower than the price they could get if they exited the market now to re-enter it in September, a price that would smooth out the consumption of widgets between now and then.

Little by little, sellers re-enter the market at that new, higher price. Whether they know it or not, whether they understand what the phrase means or not, they are intertemporally optimizing the efficiency of the market for widgets.

Which is just a high-fallutin’ way of saying that the foresight of traders is the most powerful tools we have to keep markets reliably supplied: the ultimate tool against scarcity. In fact, the only one proven to work.

To the extent that scarcity arises, what we’re really seeing is the outcome of government action to criminalize the exercise of intelligent foresight by traders. Which, ultimately, is what the "war" on speculation comes down to: a war on thinking lucidly about the future when you buy or sell something.  

I have absolutely no doubt about the government’s earnest commitment to waging that war, to the bitter end. Indeed, it’s a commitment they demonstrate copiously day in and day out.