Wed, 17 Sep 2008

In Defense of Speculators

Paul Graham, who expressed a fair amount of common sense in his Mind the Gap essay, drops the ball when it comes to speculators. He says that speculators don't create wealth. Oh, but they do.

Speculators create value for people by shifting wealth in time. Let's say that we're running out of oil, and oil will be much more expensive in a few years. Speculators will invest their capital in buying oil now with the idea of selling it later when it's more expensive. An inevitable result of that is to increase the demand, and thus price of oil.

If the speculator is right, they have earned their wealth by increasing the price of oil now, so that people can make plans to use less of it in the future when it costs a lot more. If the speculator is wrong, they lose their wealth, and with it their ability to speculate.

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