The Speculator’s Edge, Seven

The Speculator’s Edge, Seven

The Important Role of the Speculator

In the previous instalments we learned that the subjective valuations of consumers ultimately dictate how society’s scarce productive resources will be allocated. If the markets were comprised of only producers and consumers, the process would be very inefficient. Consumers are concerned with their needs today. They purchase the food, clothing, and other goods they want today. They are rarely concerned with next year’s desires, and when they are, they are probably acting in a speculative capacity (which, of course, all of us are free to do). By looking to the future, speculators assure that society’s productive resources will be allocated not only according to the current preferences of consumers, but also taking into account their probable needs for tomorrow.

The objective of speculators is to profit from anticipated changes in conditions. Unlike those who purchase for consumption, speculators purchase in anticipation of being able to sell later at a higher price, and they sell in anticipation of buying in at a lower price. Accordingly, the valuation process of speculators differs significantly in character from that of consumers. Consumers are interested only in the current utility of a good to them. Speculators purchase not for their own consumption and not based on current utility alone. Instead, speculators are interested in what they assess the utility of a good to consumers will be in the future.

If conditions were static, the market would cause goods and services to be produced and distributed such that no further action by any individual would be perceived to be advantageous. Sellers would sell all that they were willing to sell at the prevailing price. Buyers would buy all that they were willing to buy. Prices would reach equilibrium and then become final. Trade would cease. Society’s utility would be maximized. There would be no reason to speculate, no benefit that speculation might confer on the economy.

But conditions change continually and the needs, valuations, and means of consumers change as well. And it is here that the speculator enters the picture. While it is the preference of consumers that ultimately determines the price of a good, it is the activity of speculators that pushes the market forward. The action of speculators as a class does not cause prices to reflect current utility, but instead moves prices to reflect future utility. As prices are determined in the markets there can be no distinction between the demand of consumers and that of speculators. That is, the speculators compete with consumers based on the speculators’ assessment of the consumers future needs. To succeed, speculators must have a keener ability to adjust to changing conditions than producers or consumers.

The Speculator’s Edge,

Albert Peter Pacelli