Chapter 22 The Speculator
Kill the speculators is a crime made during every famine that has ever existed.
Uttered by demagogues who think that the speculator causes death through starvation by raising food prices,
this cry is fervently supported by the masses of economic illiterates.
This kind of thinking, or rather non-thinking, has allowed dictators to impose even the death penalty for traders in food who charge high prices during famines, and without the feeblest of protests from those usually concerned with civil rights and liberties.
Yet the truth of the matter is that far from causing starvation and famines, it is the
speculator who prevents them.
And far from safeguarding the lives of the people, it is the dictator who must bear the
prime responsibility for causing the famine in the first place.
Thus, the popular hatred for the speculator is as great a perversion of justice as can
be imagined.
We can best see this by realizing that the speculator is a person who buys and sells
commodities in the hope of making a profit.
He is the one who, in the time-honored phrase, tries to buy low and sell high.
But what does buying low, selling high and making large profits have to do with saving
people from starvation?
Adam Smith explained it best with the doctrine of the invisible hand.
According to this doctrine, every individual endeavors to employ his capital so that its
produce may be of the greatest value.
He generally neither intends to promote the public interest, nor knows how much he is
promoting it, and he intends only his own security, his own gain.
He is led in this as if by an invisible hand to promote an end which was no part of his
intention.
By pursuing his own interest, he frequently promotes that of society more effectually
than when he really intends to promote it.
The successful speculator, therefore, acting in his own selfish interest, neither knowing
nor caring about the public good, promotes it.
First, the speculator lessens the effects of famine by storing food in times of plenty,
through a motive of personal profit.
He buys and stores food against the day when it might be scarce, enabling him to sell at
a higher price.
The consequences of his activity are far-reaching.
They act as a signal to other people in the society who are encouraged by the speculator's
to do likewise. Consumers are encouraged to eat less and save more, importers to import more, farmers to improve their crop yields, builders to erect more storage facilities, and merchants to store more food.
Thus, fulfilling the doctrine of the invisible hand, the speculator, by his profit-seeking
activity, causes more food to be stored during years of plenty than otherwise would have
been the case, thereby lessening the effects of the lean years to come.
However, objections will be raised that these good consequences will follow only if the
speculator is correct in his assessment of future conditions.
What if he is wrong?
What if he predicts years of plenty and, by selling, encourages others to do likewise
and lean years follow?
In this case, wouldn't he be responsible for increasing the severity of the famine?
Yes.
If the speculator is wrong, he would be responsible for a great deal of harm.
But there are powerful forces at work which tend to eliminate incompetent speculators.
Thus, the danger they represent and the harm they do are more theoretical than real.
The speculator who guesses wrong will suffer severe financial losses.
Buying high and selling low may misdirect the economy, but it surely creates havoc with
the speculator's pocketbook.
A speculator cannot be expected to have a perfect record of prediction.
But if the speculator guesses wrong more often than right, he will tend to lose his stock
of capital.
Thus, he will not remain in a position where he can increase the severity of famines by
his errors.
The same activity which harms the public automatically harms the speculator, and so prevents him
from continuing such activities.
Thus, at any given time, existing speculators are likely to be very efficient indeed, and
therefore, beneficial to the economy.
Contrast this with the activity of governmental agencies when they assume the speculator's
task of stabilizing the food market.
They too try to steer a fine line between storing up too little food and storing up
too much.
But if they are in error, there is no weeding out process.
The salary of a government employee does not rise and fall with the success of his speculative
ventures.
Since it is not his own money which will be gained or lost, the care with which bureaucrats
can be expected to attend to their speculations leaves much to be desired.
There is no automatic, ongoing, daily improvement in the accuracy of bureaucrats, as there is
for Private Speculators.
The oft-quoted objection remains that the speculator causes food prices to rise.
If his activity is carefully studied, however, it will be seen that the total effect is rather
the stabilization of prices.
In times of plenty when food prices are unusually low, the speculator buys.
He takes some of the food off the market, thus causing prices to rise.
In the lean years which follow, this stored food goes on the market, thus causing prices
to fall.
Of course, food will be costly during a famine, and the speculator will sell it for more than
his original purchase price.
But food will not be as costly as it would have been without his activity.
It should be remembered that the speculator does not cause food shortages, which are usually
the result of crop failures and other natural or man-made disasters.
The effect of the speculator on food prices is to level them off.
In times of plenty,ivid when food prices are low, the speculator by buying up and storing
food causes them to rise.
In times of famine, when food prices are high, the speculator sells off and causes prices
to fall.
The effect on him is to earn profits.
This is not villainous.
On the contrary, the speculator performs a valuable service.
Yet instead of honoring the speculator, demagogues and their followers revile him.
Prohibiting food speculation has the same effect on society as preventing squirrels from storing up nuts for winter.
It leads to starvation.