The Speculator’s Edge, Nine

The Speculator’s Edge, Nine

How Speculators get Paid

So far we have learned…

1) The pricing process is a social process. Prices are the results of subjective valuations of individual members of society and are subject to change at their whim. Ludwig von Mises, an economist of the conservative Austrian school put it this way:

“But supply and demand are only the links in a chain of phenomena, one end of which has this visible manifestation in the market, while the other is anchored deep in the human mind.”

The process is not scientific. It is not mathematical. It is not mystical or astrological. On an individual level it is psychological. On a mass level it is social.

2) All known prices are historical facts. The notion of current market prices is fictional. Prices are neither current nor of the market. Trades that have occurred are historical facts. They occur only between individuals.

3) There is no such thing as fair value. Value is in the eye of the beholder. In fact, the law of marginal utility tells us that the value of a good varies even on an individual level, depending on how much of it the individual already has. When a trade occurs, it occurs because the parties to the trade disagree as to the utility of the good traded. For the trade to have occurred, it must have been subjectively viewed as advantageous to each party.

4) All prices are independent of one another. Each valuation is an individual valuation. It is subject to change at no notice and for no reason. In assessing an uncertain future, a person may use only experience and reason. Admittedly, past prices are a part of man’s experience and as such must play a part in his or her thinking about the future. But it is the anticipation of future conditions that determines current valuations, not past prices.

5) The supply and demand curves are fictional descriptions that never occur. That ceteris paribus (all things being equal) greater supply would exist at higher prices is a rational conclusion. But ceteris are never paribus (non-price determinants never are the same).

6) While ultimately price depends on current utility to consumers, at any given moment it reflects speculative assessment of future utility. Consumers determine price. But, it is not merely current consumption that determines price; it is the anticipated consumption as well.

7) The people doing the anticipating are speculators. Speculators act as conduits between producers and consumers assuming unwanted risks of production and rationing supply among consumers so as to maximize utility.

The Speculator's Edge,
Albert Peter Pacelli