The Freeman: Ideas on Liberty - August 1999
Vol. 49 No. 8
Columns:
Conservation and Speculation
By Dwight R. Lee
Dwight Lee is Ramsey Professor at the Terry College of Business, University of Georgia, and an adjunct fellow at the Center for Study of American Business at Washington University.
I often ask my students, “How many of you are in favor of conservation?” Except for those who are asleep, every hand goes up. I then ask, “How many of you are in favor of speculators?” and almost no one raises his hand. The students see conservation as a noble activity that prevents people from squandering resources now to insure that adequate quantities will be available in the future. On the other hand, they see speculation as the greedy hoarding of valuable resources now in order to gouge those who will need those resources later. I attempt to explain that if they are serious about conservation, they should also applaud speculation. The speculation that results from private property and the desire for profits is the most powerful force for beneficial conservation.
The Right Amount of Conservation
Without private property rights there could be no speculation for personal profit and no meaningful conservation. As discussed last month, animal species that are not privately owned are the ones at risk of extinction. Without private property no one has an incentive to conserve a resource, since no one can benefit from doing so. But if I own a resource and believe its value is going to be greater in the future (after considering the cost of holding it—including the opportunity cost of forgoing interest), I will conserve it for future use or sale. Similarly, even if I don’t own a resource, but I believe its value is going to increase, I will buy it at today’s price in order to conserve (hoard) it and then sell it at the expected higher price later.
But why should we depend on private property and greed to conserve valuable resources? Why not have the government determine how much of a resource should be conserved and then limit its current use accordingly? Relying on government to enforce conservation would be foolish even if the right amount of conservation were known. If government has enough power to allocate a resource over time, it has enough power to allocate its use to competing alternatives at each point in time. This much power guarantees waste, as special-interest influence replaces the cooperation of market exchange in determining how and where resources are used.
But even if the public interest, rather than special interests, motivated government decisions (dream on), the authorities could never determine the right amount of conservation as accurately as speculators subject to the discipline of the marketplace. There can be too much as well as too little conservation. Just as we don’t want to use resources today that will be worth a lot more in the future, neither do we want to sacrifice consumption today to conserve resources that will be worth less in the future.
Speculators Do It Better
Even if government authorities were not subject to special-interest influence, they would have less motivation to conserve wisely than speculators do. If bureaucrats make wasteful decisions, their salaries aren’t reduced. Indeed, their failures often result in larger budgets, supposedly so they can do a better job. In sharp contrast, speculators make money only if they conserve wisely—purchasing resources (holding them off the market) when they are less valuable and selling them (making them available) when they are more valuable. If speculators don’t conserve enough they pass up profitable opportunities to buy low and sell high, and if they conserve too much they lose money by buying high and selling low. As opposed to bureaucrats, who can survive despite their mistakes, the speculator who consistently makes mistakes is soon relieved of the money necessary to continue speculating.
Speculators can also act much more quickly than any government agency. For example, at the first indication that next year’s Brazilian coffee crop will be devastated by a frost, speculators will immediately purchase raw coffee beans to store them until next year. Consumers will still see plenty of ground coffee in the stores, but suddenly the prices will be higher. What consumers don’t see is that coffee prices will be lower next year than they otherwise would have been because they are higher today, and that their reduced consumption today will be more than compensated by their greater consumption later. The complaint will be that greedy speculators have unnecessarily driven up prices. Interestingly, the universal complaint against speculators that they cause current prices to be too high is really a complaint that they conserve too much.
Don’t Complain Out Loud
I find it fascinating that people who believe that speculators are responsible for prices being too high complain about it out loud. The last thing you should do if you are convinced that speculators are harming the public by driving up the prices of important resources is to let others know. If you are correct, you can make yourself a fortune by keeping quiet, while providing a valuable public service at the same time. If the public is being harmed by speculative buying, it is because coffee is being taken off the market now when it is worth more than it will be later. If this is so, you would be right to criticize speculators for harmful price increases.
But this is a problem you can help correct. Simply call your broker and sell coffee short. Selling short means borrowing a quantity of coffee (from a speculator) and selling it at the currently high price. When the price falls later, you can buy the quantity borrowed, repay the speculator, and pocket the difference between the two prices. (You will have sold high and bought low.) If you were correct about market conditions, you will have made the coffee available to consumers now and made a profit. Why you should keep your criticism of speculators secret is obvious. If others believe you, they will sell coffee short themselves, which will drive down the current price and increase the future price, thereby reducing your profit opportunities.
Too Important to Leave to the “Experts”
Why don’t we hear fewer people complaining about speculators and see more people selling short? The answer has to be that most people find complaining easier than understanding what they are complaining about. But the objective here is not to criticize. The important point is that anyone who believes he has better information on the future value of resources or commodities than is reflected in market prices can both profit personally and benefit society by acting on that information—if he is right. So when conservation is left to speculators, far more relevant information from far more people with far more at stake is acted on than if conservation is left to government.
Conservation is important, much too important to leave to government “experts.” There is no better way of achieving sensible conservation than through the concern for the future that is motivated by private property, market exchange, and speculators putting their own money on the line.
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