The Specter of Speculators

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Chance is a word devoid of sense; nothing can exist without a cause.
~ Voltaire

Whenever regulatory schemes of the state go awry, urgent campaigns are undertaken to find scapegoats upon whom to unload explanations for the ensuing failures. We saw this in the so-called "savings and loan scandals," when governmental restrictions on the industry combined with rapidly growing inflation that raised interest rates into double-digit numbers, produced disastrous consequences. Because the state knew that the regulatory system had to be protected at all costs, a number of S & L executives were singled out for the blame. This practice continues today, with managers of hedge funds facing criminal prosecutions for the investment decisions they made during periods of economic tumult. Someone other than government regulators must be held to account for such dislocations, and the prosecution of those who failed to respond adequately to the state-generated confusion will be used to convince Boobus that state regulation does work to instill order and protect his interests!

With rising gasoline and food prices, a number of legislators have urged more laws to control "speculation," particularly in the commodities markets. The economic genius, Sen. Joe Lieberman, would like to prohibit major investment firms from entering the commodity markets, with warning signs reading "no speculators allowed." His compatriot in commercial wizardry, Sen. Carl Levin, berated an official of the Commodity Futures Trading Commission. "You study it, but you don’t act against this incredible increase in speculation," he lamented, adding that unless this agency takes action against speculators, "we don’t have a cop on the beat."

Such is the litany that has always accompanied vertically-structured, command-and-control social systems. The priesthood of this faith insists that, in a complex world, order depends upon what Lieberman termed more precise legislative definitions of prohibited conduct, and upon Levin’s "cop on the beat" to enforce the constantly redefined rules. But it is precisely this mindset of societies run from the top down in the up-to-date fashion of the Code of Hammurabi, that no longer inspires the respect of intelligent minds. The study of chaos and complexity inform us that, the more complex a system becomes, the more impossible it is to predict outcomes. More than any other factor that is bringing Western civilization to a close is, I suspect, the failure of people to understand this inherently unpredictable nature of our world; and to grasp the fact that order arises spontaneously as an unintended consequence of the pursuit of individual self-interest.

This politically-driven fear of speculators is, at base, a fear of the inherent uncertainties of any complex society; inconstancies rendered even more ambiguous by political interventions that disrupt the spontaneously-generated regularities of the marketplace and other social behavior. But the spontaneously-derived patterns that emerge as a composite of millions-upon-millions of private decisions, do not always work to the benefit of those members of society who believe that they are entitled to something more than what their neighbors are prepared to provide them. If a business firm, for instance, is unable to obtain sales of its products at prices it desires, it may turn to the state for legislation criminalizing the lower-priced practices of its competitors as "unfair." It is a consequence of the "law of large numbers" that firms with concentrated economic interests will have a greater incentive to seek such regulation than will those with diffused interests (e.g., consumers). As a result, legislative halls will be filled with lobbyists hired by these more dominant interests to do one thing: to get the state to provide them with benefits they are unable to obtain, freely, in the marketplace.

A spontaneously-ordered society is much like a spider web, with a network of interconnectedness created not by a single spider, but by millions of people interacting with one another in mutually-beneficial ways. There are patterns to which each of us pays attention, but are not compelled to conform (e.g., I may observe that the price for copper has gone down, but I am not required to buy any of it, nor am I prohibited from buying copper from another at a higher price).

When the state intervenes to regulate aspects of this orderly system (e.g., price controls), it is as though a rock had been thrown through the web, disrupting — or even destroying — the existing connections. The regulation creates confusion and even greater uncertainty than would otherwise exist within a complex system. Will the state impose additional restrictions or, perhaps, reduce those already in place? What are the likely consequences of such uncertainties for individuals who might want to enter into long-term contracts with one another? Within such a setting made increasingly unclear by the inconsistencies between marketplace and political pressures, individuals must act. As with the origins of spontaneously-ordered systems, such persons will act not for the purpose of reconnecting the patterns disrupted by regulatory machinery, but to successfully pursue their respective interests within the broken strands.

Even within a completely free market, there will be a great deal of uncertainty that accompanies our actions. How do we make decisions in such a setting? Most new businesses fail within a year or two after their inauguration, and yet this statistical fact does not deter sizeable numbers of men and women from investing their time and other resources in speculating that their vision of a successful enterprise will be realized. This is one of the qualities I so admire in entrepreneurs: the willingness to take major risks with their own resources to pursue their self-interests in an unpredictable world. It is such a willingness to "speculate" that underlies a productive society.

But there are considerable costs associated with speculative undertakings. The failure to anticipate and account for such costs greatly increases the likelihood of failure. Government regulation is the source of many of these costs. Indeed, it can be said that the state exists for no other purpose than to impose costs upon one group of people in order to provide benefits for others who are unable or unwilling to obtain them in the free exchanges of the marketplace. The war in Iraq is forcing the Iraqi people to bear costs that benefit political and corporate interests, while government licensing requirements impose costs on would-be entrants — and consumers — into a business or profession in order to protect existing licensees from added competition.

The factor that is most responsible for maintaining the constantly fluctuating order within the marketplace, is the pricing system. While price changes are affected by a number of considerations (e.g., the intensity of demand on the part of customers), buyers and sellers alike make their decisions as to whether to produce or to purchase various goods and services based upon both existing and anticipated prices. It is the pricing mechanism that political systems so often tinker with, creating discrepancies between the actual preferences of marketplace participants, and the state-mandated prices. Like a rock thrown through a spider’s web, this action both disrupts and distorts the messages that prices signal to one and all. If the state arbitrarily sets a price below that prevailing in the marketplace (e.g., rent control laws), it generates an increased demand on the part of purchasers that sellers (e.g., landlords) are unwilling to satisfy. Likewise, if the state mandates prices above the market levels (e.g., minimum wage laws), it sends a message to potential employees that there is a greater demand for their services than is actually the case.

It is within this area of discrepancy that buyers and sellers must operate when making their respective decisions. When the state — through its central banks — sets interest rates below market prices for money, it creates the impression that there is a greater supply of this resource than is the case. Borrowers — misled by such distorted information — make investment decisions that are not reflective of the amount of money actually available in the market. As Murray Rothbard has shown in his book, America’s Great Depression, it was such governmental practices that were responsible for this defining period in our economic history.

The more that government regulation distorts the market, the more the statists insist upon further intrusions to remedy the politicogenic problems. One regulatory failure begets two corrective measures, the failures of which result in four more remedial responses, ad nauseum. The more marketplace distortion that is created by such escalating interventions, the greater uncertainty that attends economic decision-making. In such a confused setting — in which the market tries to reestablish its regularities — market participants are forced to speculate a great deal more than would be the case where the pricing system was allowed to function.

The escalating prices for oil, food, and other necessities are factors about which each of us must speculate in planning our lives. From those who invest in petroleum futures to you and I contemplating summer vacation plans, speculation about oil prices will be at the center of our decision-making. Will such prices continue to go up and, if so, will this make airline travel to a vacation spot too expensive? Can we afford to drive to our desired location?

Southwest Airlines provides an example of how intelligent minds can successfully navigate these currents of uncertainty. Anticipating that the price of oil would continue to rise, this airline hedged on future prices (i.e., speculated) and locked itself in to purchase oil at what has proven to be a lower price than now prevails. Southwest, in other words, ran the risk that oil prices might level off, in which case it would be contractually obligated to make purchases at higher than market prices. Such intelligent foresight — benefiting both Southwest in keeping its operating costs down, as well as its customers who are thus not burdened by higher fares — is what some legislators seek to criminalize!

Under the best of circumstances, the complexities of the marketplace render all of our investment decisions speculative. If you doubt this, ask any stock broker to guarantee you the future performance of your United Updike stock. Even the most astute investors are unable to do this. The Warren Buffets of our world are better able than the rest of us to profitably speculate about the future, but speculation nonetheless underlies each of their decisions.

A magazine to which I subscribe has a question on a recent cover that reads "how can we protect business from risk?" In a world of uncertainty, all of life involves risk. It is the function of intelligence to identify and assess the factors that may influence a course of action. Because we will never be able to marshal all of these causal components, we are destined to act with varying degrees of unpredictability.

The creative process — upon which our lives depend — requires us to become comfortable with this fact of uncertainty even as we speculate about the outcomes of our actions. Our ancestors moved about the globe — as we still do — speculating that another setting might be more beneficial to their interests than the one left behind.

The state has not made our world uncertain and unpredictable: the very nature of complex systems has caused that. But the state — by distorting the marketplace signals upon which we must rely — has twisted such messages and damaged or destroyed economic opportunities in ways that intensify uncertainty and make it increasingly difficult to calculate risks. Wars, price and production controls, inflationary practices, monetary policies, and other disruptions make our actions increasingly speculative as to outcomes. Were I to re-label all of your prescribed medications, such that you weren’t certain as to which to take, and in what dosage, for given symptoms, do you think your health might be jeopardized as a result? Should you — rather than I — be railed at by political hacks, or punished for engaging in speculation as to which medication to take?

The lifeblood of the state is grounded in the illusion that it can protect us from fears and uncertainties, and provide us with a sense of security against the vicissitudes that define life itself. In furtherance of such fantasies, politicians and state officials are forever concocting fears with which to terrify the citizenry, and erecting scarecrows to ward off such imagined specters. As the state continues to increase — in seemingly exponential rates — the disordered confusion that its policies have generated, decision-making on the part of ordinary people becomes all the more speculative. Such politically-induced consequences become yet another fear against which the Liebermans, Levins, and other architects of economic dysfunction, again promise to protect a gullible public.

Butler Shaffer [send him e-mail] teaches at the Southwestern University School of Law. He is the author of Calculated Chaos: Institutional Threats to Peace and Human Survival.

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