I hear that some people want to outlaw speculation. I guess they don’t understand that speculation is what drives capitalism, or that the precious little difference between speculation and investment lives almost entirely in the eye of the beholder.
If you were going to make speculation illegal, how could you define it so that you would not prohibit investment? Are you speculating any time you put your money into something without the intention of making use of it yourself? What makes stocks and bonds any different? Aren’t the buyers and sellers of those speculators?
We need speculators. Speculators help entrepreneurs found new businesses. Heck, entrepreneurs are speculators who speculate they can make something big out of something very small.
Speculators are the lifeblood of our society. A speculator believes in ope, and puts his money where his mouth is. Does that mean that there is no problem? Is there some point or degree when speculation turns from good to bad?
Actuallly, it turns out that there is. Speculation is great for the system when the supply of speculators is limited. When everybody wants to be a speculator, things get out of hand. You get too much money chasing too few goods, and the cost of those goods inflates, sometimes wildly. This is not good for the consumers of those goods, and it is not good for those holding the bag when the speculators move on to another fashion.
Can we stop this? If so, do we want to? I don’t think we can stop speculation, and I don’t see any possible good coming from an effort to try. I am not even sure that more information helps since information feeds and caters to the speculators until it turns.
And if you hadn’t noticed, we already do the most effective thing you can do to control speculation — we tax it! Capital gains taxes are taxes on speculation. We even give people a break if they take a longer than six months view when they speculate by differentiating between short-term and long-term capital gains.
We can control some things that happen around speculation. For example, a thirteen-year old kid was reported to have bought nine houses during the housing boom. He was speculating, but that wasn’t the crime. The crime was that he was using fraudulent promises so that he coulde speculate with somebody else’s money — somebody else that did not check very deep.
If you look closely, you can see that the real problem is that the boom made people sloppy with their money. A boom is when you want to be most careful. “When life looks like Easy Street, there is danger at your door.”
So let’s not shoot the speculators, but let’s start getting real careful when it looks like everyone is speculating about the same thing.