Why Speculators? - Percy L. Greaves, Jr. - Mises Daily

Why Speculators? - Percy L. Greaves, Jr. - Mises Daily: "The prices of the New Orleans Cotton Exchange were long a valuable guide for farmers and manufacturers alike. For farmers, they indicated how much land should be planted in cotton and how much in other crops. Through the growing season, future prices indicated how much time, care, and expense should be spent in tending crops. When future prices were high, no expense was spared to bring every possible ounce to market. When future prices were low, farmers were warned not to waste too much time and expense cultivating and picking that last possible ounce.

For manufacturers and other cotton buyers, the Cotton Exchange quotations provided a base for estimating or determining their future raw-material costs. This in turn helped them calculate the prices on which they bid for future business. On orders accepted for delivery over long periods of time, they could always make sure of their raw-material costs by immediately buying contracts for delivery of cotton on the dates they would need it."

"Men act as speculators when they have only partial knowledge and understanding of the results their actions are likely to produce. The more speculators know and understand, the better they can predict the future results of their actions. But they never can be certain of the actual results.

Most speculations involve people and how they will react to given situations. Since we can never know with certainty the future reactions of others, every action which involves others is a speculative action. Thus, all voluntary actions, including market actions, are speculative."

"Frequently, the speculator is the first to foresee a future scarcity. When he does, he buys while prices are still low. His buying bids up prices, and consumption is thus more quickly adjusted to future conditions than if no one had foreseen the approaching scarcity. A larger quantity is then stored for future use and serves to reduce the hardships when the shortage becomes evident to all.

Since a price rise tends to encourage increased production, the sooner prices rise, the sooner new and additional production will be started and become available. So a successful speculator reduces both the time and the intensity of shortages as well as the hardships which always accompany shortages.

Likewise, speculators are often the first to foresee an increase in future supplies. When they do, they hasten to sell contracts for future delivery. This in turn drives down future prices earlier than would otherwise be the case. This tends to discourage new production that could only be sold at a loss. It also gives manufacturers a better idea of what future prices will actually be. So, here again the speculator tends to smooth out production and consumption to the benefit of all concerned."

"When governments set prices, quotas, acreage limits, or other hampering restrictions on the honorable activities of men, they countermand the checks and balances that the free market places on supply and demand. The result is always surpluses and shortages: the former, where producers' rewards are set too high; the latter, where they are set too low. Where there are surpluses of some things, there will always be shortages of others. For the men and materials subsidized to produce surpluses have been lured from producing those things which free-market conditions would indicate that consumers prefer."