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When the manufacturer of a freely produced commodity employs skilled chemists in research, the salaries he pays are similar to the expenditure of the speculator in perfecting his judgment; each will press his investment in this direction

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to that point beyond which he would expect no further gain. From his chemists the manufacturer will get an output of ideas which increase his productive efficiency; they swell his profits, but they cannot, even when monopolised, add to his gains an amount greater than the benefit they confer upon society. Indeed, it will generally happen that the individual (marginal) gain will be less than that of the community; in so far as this is so, investments in knowledge tend to be carried less far than is desirable. The extent to which the producer of new ideas should share in the social advantage of his improvement cannot be precisely stated in general terms, but the existence of the Patent Acts is good evidence that the individual profit tends in these cases to be too small rather than too great.

Similarly with the speculator; his agency will supply him with knowledge, the possession of which reduces his costs of production by lessening the Uncertainty which he takes over. So far the two cases are precisely similar; the investment of resources in intelligence yields differential advantages of production; if the knowledge is monopolised the individual profit is still confined within the value of the net gain in social efficiency; and if conditions of true competition obtain, the advantage is rapidly shifted to the public in a lower (or more favourable) price of the product.

But there is this difference. The intelligence acquired by the speculator has the effect not only of reducing his costs, but of injuring the machinery which regulates the reward of the factors of production. Society protects itself against exploitation, not by directly allotting similar payments to similar costs, but by providing for the free exchange of the products of those costs. In order that the community shall give no more than it receives it is essential that buyer and seller should have equal knowledge of the commodity in which they deal; any variation from this condition destroys the efficiency of the method by which reward is regulated. For this reason, therefore, the superior knowledge of the speculator enables him to transfer wealth from others to himself; and this advantage can be destroyed only by the most complete competition which will reduce the price of his services to their costs of production. The same condition is essential in a trading operation ; a single arbitrageur operating between two markets, although dealing with willing buyers and sellers, may draw enormous gains from his greater knowledge of prices; but a single competitor can put buyers and sellers on an equality in knowledge with the arbitrageur, and reduce the profits of both to a normal payment for the convenience which they afford to the public.

In the absence of such competition the private gain of the speculator exceeds his social contribution, and he tends to press the production of intelligence beyond that margin at which its social value is equal to its cost, up to that point, at which his individual profit is maximised.

The point of view may be slightly shifted and the speculative operation regarded as a whole. It consists essentially of a purchase at one point of time and a sale at another; the redistribution of commodity effecting a net gain of utility. Any cheapening of the process which produces this utility is a gain of social efficiency, and enriches society (regarded as a group containing the speculator) by the excess of this utility over its cost. But the circumstance that this reduction of cost is accompanied by an unduly large transfer of wealth to the speculator tends to make him press the application of resources in this direction beyond the point socially desirable, and so to bring about a net social waste.

The provisional results may now be summarised. The direct service of the speculator lies in reducing the cost at which goods are conveyed between persons separated by time. This operation is a process of production which, like any other, adds utility to a saleable product; a utility of position which facilitates exchange, and in the case of stocks and shares reduces Financial Insecurity, thereby lowering the cost of production of capital. The expenses of this process arise from the costs of supplying skilled judgment of the future, and the service of bearing Uncertainty. The investment of resources in the production of intelligence tends to be pushed too far, for the reason that the possession of superior knowledge allows the speculator to transfer wealth from others to himself to an extent which has no relation to the value of his service. Hence arises a divergence between social and individual interest which can be removed only by the presence of competition sufficiently free to eliminate the ignorance of those with whom the speculator deals, and to reduce his profit to the cost of production of his services. In speculative operations it is therefore only the force of free competition which gives society that natural protection which, in other cases, whether under monopoly or free competition, confines the profit of the individual within the value of bis contribution to the community.

The limited nature of this provisional conclusion soon becomes apparent, however, when we turn to the actual work of the speculator on the Stock Exchange, which may conveniently be considered by looking at the general conditions governing his costs of production. The first element is the bearing of Uncertainty. The real cost of supplying this service is probably lessened by the speculator's temperament; his power of doing so must certainly depend very closely upon his facilities for obtaining control over capital; for the exposure of £l to a given risk of loss is an evil which obviously diminishes with every increase in the quantity of resources disposable, and in the variety of their distribution. Both the wealth of the jobber and other speculators, and the service of the banks in extending their control over resources, are therefore of the first importance in reducing the costs of the market.

The second element consists of the reduction of Uncertainty. As knowledge of the future extends, Uncertainty declines indefinitely; at its vanishing point the speculator's service lies entirely in the production of intelligence. Probably the skill and experience of the jobber enable him to effect a considerable economy in this way, but, passing outwards to the public, knowledge and judgment, though corrected to some extent by the broker's advice, decline in value and rapidly reach a point where they are negligible relative to ignorance. In these outlying regions the social value of the speculator becomes indeterminate. He increases the marketability of securities, and therefore reduces Insecurity, but while he bears Uncertainty for a payment which is likely in general to be negative, he increases the amount to be borne by the market by the incalculable fluctuations of price which result from his fitful operations. This ambiguity in the social effects of the unskilled speculator shows immediately that the simple statement of his direct product does not exhaust the account of his influence upon the market. His primary service consists of a commercial operation between two prices separated by time and results directly and necessarily in a diminution of Financial Insecurity. The efficient performance of this act requires him to reduce the Uncertainty falling upon himself, and this he does merely by obtaining a superior knowledge of the future course of prices. But while his operations will result in prices tending to move towards those which he anticipates, it is by no means necessary either that they should be steadier or that they should move towards prices more nearly approximating to investment values. The gathering of his profits is independent of his influence, both upon the variability and the accuracy of price. Every speculative act influences price, but the speculative gain may be independent of the social results of that price movement; the control of price in the interests of the community is not a service deposited with the speculator by economic circumstances which make his profits dependent upon its performance. The social value of his influence on prices may be positive or negative; it is purely fortuitous, and depends, not upon the self-interest of any business group, but upon the particular environment in which the speculator operates.

This circumstance suggests at once that in attempting to estimate the socíal importance of a process of production it is insufficient to consider only its direct product; account must be taken also of any other social results involved in its operation.

The profit of producers in general is limited by the value of the direct exchangeable product which alone forms the incentive to their operations; the social gain is given by the algebraic sum of the value of both direct and indirect results. The services of a railway involve an indirect effect, a surreptitious educative influence upon the community which, using Professor Pigou's terms, make the social, greater than the individual, net product; in such a process as banking these indirect results are perhaps negligible; in the building trade the social gain is less than that of the producers by the evil effects upon labour of its discontinuous employment, evils which do not fall wholly upon builders, but are distributed over society in general. It is evident, therefore, that the indirect effects of various branches of production pass from a maximum positive value through zero, where individual and social net product are equal, to a large negative quantity; the series is distributed between two such extremes as the output of new ideas and the process of production of a pickpocket.

The provisional conclusion that in the presence of free competition the direct service of the speculator must be advantageous to society, needs therefore to be supplemented by a consideration, first, as to the extent to which free competition does, in fact, obtain ; and, secondly, by an estimate of the importance of the indirect effects of speculator's operations; and these latter effects are the more difficult to estimate for the reason that their importance cannot be examined theoretically by any consideration of the marginal equilibrium of cost and utility in conditions of free exchange, but are questions of fact which can be answered only from direct observation.

One of the most prominent indirect effects of speculation is the instability which its practice introduces into living; it destroys that relation between “conduct and consequence ” which is the basis of rational action. No attempt can be made to measure these effects; even if it were possible, the moral evil which they involve would remain largely a matter of opinion. It is perhaps reasonable to consider them set off by the pleasures of speculation, an influence scarcely less measurable, but evidently of great importance in lowering the costs of the market.

We may therefore neglect these indefinite effects and pass to consider the nature and importance of the speculator's influence upon the price of securities.

It happens that the conditions in many markets-in particular where, as in the market for wheat, the volume of commodity is very great-prevent the speculator from profiting by any attempt to control future prices, and limit his gains to those obtained upon operations which, if intelligently directed, have the effect of smoothing price changes due to the natural course of events. But the opinion that the total effects of the speculator's operations in such conditions show a balance of advantage to society cannot be extended to the Stock Exchange without taking account of the very considerable differences between the two markets.

Securities differ from produce in several important respects. First, a group of stocks and shares is not homogeneous, like interchangeable grades of wheat; the quantity of any issue is often comparatively small, a condition which gives greater scope for manipulation, and, by increasing the risks of short selling, diminishes its corrective influence. Secondly, while the value of each is subject to variations arising from both general and particular causes, in the case of the latter not only intelligence, but also control, is in a great measure lodged with interested parties. Finally, the income from securities is often far less definite and certain than that from produce; they are held in vast quantities by a public very imperfectly informed, and therefore highly susceptible to suggestion; that is to say, the public demand curve for securities is not independent of price, but may be influenced by its fluctuations.

The high importance of establishing prices conforming to a normal level is derived from the function of price in regulating production and consumption ; that is, in effecting a more perfect adaptation of supply and in facilitating that distribution of the output which maximises its utility. The adjustment of resources in production is governed not by momentary prices but rather by an average price over a period which varies with the conditions

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