Let's Hear It for Speculators!
GMU Econ prof Donald Boudreaux:
Speculators should be celebrated — not so much for their motives (which are no better or worse than normal) but for the socially beneficial, if largely invisible, consequences of their activities. Speculation makes resources more abundant when there is great scarcity by encouraging people to use those resources more sparingly when there is relative abundance.
Suppose a village on the west side of a mountain range has an unusually good wheat harvest, but a village on the east side loses most of its crop to drought. Everyone agrees that wheat should be shipped from where it’s relatively abundant to where it’s in short supply. Commerce and market prices ensure that such shipments occur.
Wheat prices in the drought-stricken east village will be high, while prices in the village with the good harvest will be low. So merchants will buy wheat on the cheap in the west — causing its price there to rise — and ship it to the east village, where it will be sold at a profit.
It’s true that these merchants are motivated by self-interest. No matter. They perform the beneficial task of distributing supplies more equally and sensibly. Because of the merchants’ profit-seeking response to the difference in prices between the two villages, people who need wheat less urgently are encouraged by higher prices to use less of it, so that people who need wheat more urgently get what they need. Surely this result deserves applause.
Speculators perform the very same task. The only difference is that, with speculation, people who need resources more urgently are separated from people who need them less urgently not by a physical barrier, but by time.
Notes
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