Speculation exists in two main forms. The first form is as an activity which makes it easier and cheaper for those wishing to mitigate risk in financial institutions, where speculators act as counterparties to business-generated financial transactions. This liquidity provision has a net benefit to everyone.
The second form is as a zero-sum game, where speculators play against each other: if one participant makes money the other will lose it. Strictly speaking it is a sub-zero sum game due to the cost of playing the game through phenomena such as transaction costs but that is not important to my point here.
The majority of financial transactions, by both volume and value, fall into the second category, so it is the one that I will focus on.
I believe that the more one earns in the zero-sum game version of speculation, the more wealth is being diverted from other participants, many of whom would be spending it on items such as luxury cars, expensive holidays etc. If this money is instead going to philanthropic causes, then one is stopping resources being allocated to pursuits such as building $100,000 watches and private jets and reallocating it to endeavours centred on relieving suffering which are perhaps more worthwhile.
My belief that it is acceptable to be a speculator therefore boils down to three main assumptions:
- The majority of speculators are remunerated in a zero-sum game.
- Some of the other players of the game would spend their winnings in a way that encourages the allocation of resources to less "useful" activities.
- Playing this game does not have a net negative effect on those outside the game.
The frequent concerns people have regarding the net effect of speculation are two-fold:
- Occasionally speculation has a direct negative effect on people's lives, e.g. driving up commodity prices so that less affluent people cannot afford to eat. (For the record, I do not subscribe to the present populist view that the short-selling of equities is bad for society per se).
- The majority of speculators are paid very highly. Seeing as the financial benefit from speculation to society by providing liquidity is probably (I say probably because this is very hard to estimate) low relative to the compensation that most speculators receive, i.e. that speculators are remunerated disproportionately in comparison to the benefit they bring, wealth must in general being moved from elsewhere.
I agree with the first criticism and believe that I have been successful in never engaging in activities of this form.
In relation to the second criticism, many people would agree that it would be better to live in a world where it was not possible for a few people to amass huge sums of wealth whilst others are living in miserable poverty. However, given the current financial system which includes speculation, I feel it is not ideal but acceptable for me to be a speculator, provided I redistribute a proportion of my remuneration to philanthropic causes.
The reason I say that it is not ideal, is that the money never flows directly to these organisations and it is arguable that it would still be better if this system was organised in such a way that people’s compensation was more evenly distributed. This system will continue in exactly the same fashion regardless of the absence of my participation, and if I am not playing in it then someone else less inclined to spend my money in the way I do is likely to take my place.
I therefore believe that the main argument against what I choose to do with my time is that I could be trying to change this present system of wealth asymmetry instead of embracing it, albeit in the most philanthropic way I can conceive of. However, this system is very deeply imbedded and many of the alternatives that most people propose in terms of a flat rejection of capitalism appear to me to be very naive. I am open to alternatives, but until I am presented with one that is realistic given our present situation, will remain an active speculator.