Thursday, March 15, 2012

More Speculation Nonsense

I regret that the “profitable speculation” diagram has disappeared from economics texts. If more people knew it, we could avoid unnecessary nonsense. Even observers from the right have no idea of  the positive role of profitable speculation.  Bill O’Reilly this evening launched another attack on speculators.

If Bernie Sanders’ (and others’) proposals succeeded in eliminating speculation, we would experience broader price and quantity swings and would be worse off.

The concept is very simple. If speculators anticipate lower future supplies (and higher prices), they buy now and hold for future sales. If they guess right, they sell in the future at a profit. If they guess wrong, they sell in the future for a loss. The profitable speculator has moved supply from a period of relative abundance to a period of relative scarcity and has smoothed out prices. We have been made better off.

In other words, profitable speculators perform a positive service for the economy. Unprofitable speculators make things worse, but they can’t stay in business if they continue to guess wrong. They disappear. Those with a knack for speculation remain and smooth out prices and supplies.

Notice that there is no outcry when speculators conclude that future supplies will improve and they push prices down.

I guess that people will never understand this simple proposition. So we’ll have to live with this hot air.

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