Advancing a Free Society

The Value of Profitable Speculation

Sunday, May 2, 2010

Throughout history people who make good profits during economic crises have been condemned as “speculators”, and used as scapegoats, often by the very governments whose policies caused a crisis. These speculators have been imprisoned, and sometimes even put to death Successful speculators, however, usually dampen fluctuations in outputs and prices, and help provide markets where companies can hedge risks that accompany their business activities.

Posner’s definition of speculation as bets placed on future prices of assets or commodities is good enough for my purpose. A speculator in the oil market, for example, would buy some quantity of oil contracts at a given price with the expectation that he will sell these contracts in the future at a sufficiently higher prices than he paid to justify interest carrying costs, and other costs of holding these contracts. If successful he makes a profit. At the same time, however, he would serve two socially useful functions. He would raise the demand for oil now, and thereby raise present oil prices. When he sells his long contracts in the future he would raise the supply of future oil, and hence lower future oil prices. In this way, he would contribute to greater stability of oil prices over time.

Continue reading Gary Becker’s post on The Becker-Posner Blog