In Defense of Speculation

Riding to the defense of speculators, Terry Duffy, the executive chairman of exchange operator CME Group Inc. recently said, (hat tip Professor Mark Perry)

When the Dow goes above 13000, Google goes above $600 per share and everybody celebrates, who do you think did that? The U.S. equity market is 100% speculators

Rightly so.

Speculation happens not only when prices go up, but speculation also occurs when prices go down or stay stagnant.

As I previously wrote, Because we are uncertain of the future, all of us speculate.

Let me further quote the great Ludwig von Mises, (The Ultimate Foundation of Economic Science, p.50-51) [bold emphasis mine]

The term "speculate" was originally employed to signify any kind of meditation and forming of an opinion. Today it is employed with an opprobrious connotation to disparage those men who, in the capitalistic market economy, excel in better anticipating the future reactions of their fellow men than the average man does. The rationale of this semantic usage is to be seen in the inability of shortsighted people to notice the uncertainty of the future. These people fail to realize that all production activities aim at satisfying the most urgent future wants and that today no certainty about future conditions is available. They are not aware of the fact that there is a qualitative problem in providing for the future. In all the writings of the socialist authors there is not the slightest allusion to be found to the fact that one of the main problems of the conduct of production activities is to anticipate the future demands of the consumers.

Every action is a speculation, i.e., guided by a definite opinion concerning the uncertain conditions of the future. Even in short run activities this uncertainty prevails. Nobody can know whether some unexpected fact will not render vain all that he has provided for the next day or the next hour.

Politically controlling markets doesn’t solve the knowledge problem based on the issue of scarcity and human action or the “anticipation of the demands of the consumers”. Instead, interventions worsen them.

Proof?

Venezuela should be a vivid example the abject failure of price controls

From the New York Times

Venezuela is one of the world’s top oil producers at a time of soaring energy prices, yet shortages of staples like milk, meat and toilet paper are a chronic part of life here, often turning grocery shopping into a hit or miss proposition.

Some residents arrange their calendars around the once-a-week deliveries made to government-subsidized stores like this one, lining up before dawn to buy a single frozen chicken before the stock runs out. Or a couple of bags of flour. Or a bottle of cooking oil.

The shortages affect both the poor and the well-off, in surprising ways. A supermarket in the upscale La Castellana neighborhood recently had plenty of chicken and cheese — even quail eggs — but not a single roll of toilet paper. Only a few bags of coffee remained on a bottom shelf.

Asked where a shopper could get milk on a day when that, too, was out of stock, a manager said with sarcasm, “At Chávez’s house.”

At the heart of the debate is President Hugo Chávez’s socialist-inspired government, which imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. They are often the very products that are the hardest to find.

“Venezuela is too rich a country to have this,” Nery Reyes, 55, a restaurant worker, said outside a government-subsidized store in the working-class Santa Rosalía neighborhood. “I’m wasting my day here standing in line to buy one chicken and some rice.”

Venezuela was long one of the most prosperous countries in the region, with sophisticated manufacturing, vibrant agriculture and strong businesses, making it hard for many residents to accept such widespread scarcities. But amid the prosperity, the gap between rich and poor was extreme, a problem that Mr. Chávez and his ministers say they are trying to eliminate.

They blame unfettered capitalism for the country’s economic ills and argue that controls are needed to keep prices in check in a country where inflation rose to 27.6 percent last year, one of the highest rates in the world. They say companies cause shortages on purpose, holding products off the market to push up prices. This month, the government required price cuts on fruit juice, toothpaste, disposable diapers and more than a dozen other products.

“We are not asking them to lose money, just that they make money in a rational way, that they don’t rob the people,” Mr. Chávez said recently.

But many economists call it a classic case of a government causing a problem rather than solving it. Prices are set so low, they say, that companies and producers cannot make a profit. So farmers grow less food, manufacturers cut back production and retailers stock less inventory. Moreover, some of the shortages are in industries, like dairy and coffee, where the government has seized private companies and is now running them, saying it is in the national interest.

Again, the knowledge problem or the failure to anticipate consumer demands in the absence of market based prices, due to suppression of capitalist speculations through political edicts, has led to shortages, black markets and worsened standard of living.

This is another classic example of how noble intentions (or feel good political biases) clashes with economic realities.

Or as an old saw goes, the path to hell is paved with good intentions.