The Nature of Market Speculation

26 Feb

Sun Tzu the Art of War - Nature of Market SpeculationQ: Are you turned off by the zero sum and negative nature of market speculation? Especially short selling?
A: No. It is only a zero sum game for the speculators involved. For the market economy, it is a win win. The price signals sent by the changes caused by the nature of market speculation are what direct capital and labour to and from areas of greater and lessor demand. It is the central control mechanism of a market economy. Most people need both positive and negative reinforcement. Everybody gets to vote with their money. It is the most impartial and democratic system possible. You can rightfully be proud of your positive contribution to the efficiency of the economy.

Q: I see then. Without the price signals, people would not know where there are surpluses and shortages. Why then do speculators have such a negative reputation?
A: Negative, only with the uninformed or malevolent. In the former USSR speculation was a crime. The leadership understood that speculation is the method by which economic activity would be controlled if they themselves did not control economic decision making. The leadership wanted a monopoly on power. Speculators are competitors for economic and therefore political power. They are the heart of the capitalist system. That is why the socialists, communists, Keynesians and their fellow travellers spew forth their venom.

Q: Was Sun Tzu a speculator?
A: Both Sun Tzu and Jesse Livermore speculated. Sun Tzu might be characterized as an activist short seller.
He was an advisor to the monarch of a small kingdom located next to a much larger kingdom. When the neighbouring king threatened war, Sun Tzu convinced his monarch that he could defeat this neighbouring king. He then proceeded to organize and execute human action that ultimately changed subjective values such that the government of the neighbouring kingdom fled and Sun Tzu’s king took over the ten times larger kingdom.

Q: Are you suggesting that war is the same as short selling?
A: No. The contexts are different. I’m suggesting that successful warfare and successful entrepreneurial activity have more in common than is generally understood. Economics is a subdivision of the study of human action. It’s the study of how human beings economize scarce resources in a market economy; it’s a voluntary arrangement without force or fraud. Warfare uses force and fraud. Warfare is also human action. Generally, all laws applicable to human action are equally applicable to economics and warfare. That may be more than 90% of the equation, a similarity of more than 90%.

Q: Can you give me some examples that relate to the nature of market speculation?
A: Certainly. In every instance, all values are subjective, everyone has value scales, and everyone acts in accordance with those scales to remove discomfort and obtain maximum satisfaction in accordance with those value scales. This applies equally to soldier and shopkeeper. What they face is different, but their reactions are based on the same underlying law of human action. That is why Sun Tzu’s The Art of War is still in circulation after 2,500 years. That’s why Mises (Human Action) and Rothbard (Man, Economy, and State) are still in print and reaching an ever wider audience. There has been no discernible change in man’s intellect or emotions for thousands of years.

Photo credit: Emerging Birder via / CC BY-NC-SA

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