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of production of each commodity, and this effective period is likely to be much shorter in the case of securities than in produce. Mr. Emery maintains that in the wheat market improved prices may have some good influence on the regulation of supply; but if we compare the effect on the output of wheat of a few months of high wheat prices with the influence of a corresponding period of inflated prices upon the production of oil shares, it becomes evident that the influence of speculation is likely to be far greater in the latter than in the former case. Moreover, not only is the magnitude of the speculative effect likely to be greater in securities than produce, but its importance will also be greater. Company directors place a high value upon their “credit,” that is, upon their power to increase their issues in cases of great opportunity or emergency, and this power being bound up with the relative stability of the market quotation for its shares, the demand for stability is an urgent one.
Corresponding to the effect of improved prices in controlling the consumption of wheat and increasing its utility to the consumer is the effect of a closer approximation to investment values in increasing the value of securities. This closer approximation cannot, of course, increase the money yield of stocks and shares, but by narrowing the limits within which capital values fluctuate, and by giving greater knowledge of their future yield, it increases their utility by reducing the Uncertainty of the investor.
It is not, of course, possible to arrive at any very definite opinion from general reasoning of this kind, but it appears fairly clear that on the Stock Exchange, as contrasted with the produce market, accurate prices are far more important in regulating production, and not less important in the distribution of supply.
In passing to consider the general conditions which determine the actual influence exercised by the speculator on market values, the differences between the two markets are seen to become more prominent.
It has already been stated that the public interest in speculative transactions requires that they should be based on a knowledge of what future prices should be, while the speculator is concerned only that they should be based on a knowledge of what future prices actually will obtain. The degree of coincidence between these two interests depend mainly upon the volume of commodity present in the speculative market and susceptibility of the public to the suggestion of changing prices.
When the volume of commodity is as vast as that in the wheat market, the possibility of manipulation is reduced to a minimum;
a corner in wheat is, according to Mr. Emery, a thing of the past. But there is a further advantage in mere quantity; it enables the bears to reduce the balance of optimism in the market, thereby tempering the rapidity of a decline in values much as the action of bulls anticipates a rise.
It is evident that in this respect the conditions on the Stock Exchange are in general far less favourable to the establishment of improved prices. Sir Robert Giffen draws attention to the very great importance of the presence of a large volume of capital speculatively directed, which moves readily from one sound security to another, maintaining their values against fluctuations in opinion unjustified by actual conditions. No doubt this service is of very great value, but it needs to be balanced against the speculative influence on the less reputable securities. Looking at the recent oil and rubber booms, typical of many others, it seems doubtful whether the speculative price has on the balance any positive value in regulating the price of such securities. The speculator's influence in distorting price need not be due to unaided manipulation ; indeed, it is said by Mr. Hartley Withers that deliberate manipulation by powerful interests is of little importance in the London market, and this opinion is confirmed by that of business men. The evil appears to arise to a far more important extent from the continuous qualitative changes in
many securities, and the consequent extreme difficulty in estimating their value. As a result of this any change of price originated perhaps by professional speculators, re-acts upon public opinion and produces an unreasoning speculative activity which results not in correcting, but actually in reinforcing, that change.
While general reasoning goes to show that speculative operations are far less likely to result in improved prices on the Stock Exchange than in the great produce markets, it cannot yield any very definite results. If, however, one contrasts the hypothetical market formed by investors only with the actual Stock Exchange containing speculators of every shade of skill and experience, and if he reflects further that the trust companies alone direct the speculative investment of some seventy millions of pounds with a judgment far superior to that attainable by the investing public, it seems impossible to doubt that while in particular cases prices may be distorted, yet the influence upon price of the body of speculators, taken as a whole, yields a considerable net advantage to society. The beneficial effect on price may be less than in the great produce markets, but there will still be a balance of good.
Realistic inquiry is equally necessary in dealing with the
question of the efficiency of competition in beating down the speculator's profits to a normal level ; but some general observations may be made. The essential condition for effective competition in speculative operations is that of equal access to the sources of intelligence by persons of similar ability. Superior natural ability in a speculator is similar in its social effects to the possession of monopolised information which it has cost nothing to produce; its utilisation increases the aggregate wealth of the community, but gives opportunity to its possessor to spoil the public. It has already been argued that while the changing values of produce depend on general influences, intelligence of which is unrestricted, the values of securities vary also from particular causes of which knowledge and control are in some measures confined to a limited number of interested parties. This imperfect access to the sources of information, especially notable in the case of joint stock companies, must greatly limit the efficiency of competition, thereby allowing the individual, to exceed the social, net product. No doubt monopolised information cannot long be withheld from a vigilant market; it is published by the very operations in which it becomes effective, but it may be concealed from the general public for a sufficient time to allow of abnormal gains to its possessors. Without enumerating the parties—the company director, the auditor, and a host of others-in a position of differential advantage, it may perhaps be taken as established that in certain groups of securities competition acts very imperfectly in reducing the gain to be derived from exclusive knowledge to the value of its social productivity. To the extent, therefore, that the speculator is in possession of superior ability or monopolised information, his social justification is weakened, and historical prejudice against his operations is correspondingly vindicated.
When one turns to consider unorganised markets like those in land, it is easy to see that very imperfect competition may often result in the condition that the direct service of the speculator is enormously overpaid, and when there is added to this the consideration that the indirect effect of his operations is quite likely to be socially injurious, it becomes evident that the total effect of his activities may involve a very considerable loss to the community.
Summary.-The argument directed to determine the social service of the speculator on the Stock Exchange is somewhat elaborate and at present incomplete. It has tended to show that the a priori justification which attaches to the direct service of production processes in general, for the reason that its payment is derived from, and confined within, the social value of its out-put, holds for that of the speculator, but only in the presence of competition sufficiently free to eliminate from his superior intelligence, any value other than that derived from its social productivity . In fact, however, this competition being imperfect, opportunity is given for abnormal profits, and consequently the investment of resources in speculative operations tends to be pressed beyond that margin adjustment at which it is socially desirable.
The extent of this competition is a question of fact which can be answered only by an examination of each market, or, indeed, of each set of transactions. The presence of completely free competition is a guarantee that resources are invested in the reduction and bearing of Uncertainty up to that margin which is socially desirable, and therefore that the direct service of the speculator yields a net social gain. But as competition declines in efficiency the existence of this gain becomes less and less probable, and in such unorganised markets as those in land it is likely that there is a very considerable misapplication of resources, and therefore a large social waste. The indirect effects of the speculator's operations being unrelated to any social payment need to be separately estimated. It was argued that while price regulation was of greater importance on the Stock Exchange than in the produce markets, speculative influence was less likely to establish accurate prices in the former than in the latter market, and that no argument as to the total effects of speculation could be extended from one to the other. The question whether or not speculative regulation of price shows a net gain to society is again a question of fact to be separately determined for each market; it turns upon such conditions as the volume of commodity and the extent to which knowledge of the future is possible.
In the particular case of the Stock Exchange it appears to be highly likely that competition is sufficiently free to ensure a considerable net social gain from the direct service of the speculator, and while no opinion can be expressed as to the importance of the pleasures and the moral evils of speculation, it appears to be almost certain that the remaining indirect effect-that on priceyields a gain to the community, and, no payment being made for this gain, it forms a net addition to the contribution of the speculator to the efficiency of the market.
Finally these results may be translated into the terms employed in the beginning of this paper. The incentive to the speculator is derived from the profit to
be drawn from the transport of goods between two prices separated by an interval of time; his direct product is therefore the increased utility which this act adds to the goods carried. This utility appears on the Stock Exchange as an increased exchangeability of securities which facilitates the continuous redistribution of the disutilities involved in the supply of capital, thereby reducing the Financial Insecurity attaching to holders of stocks and shares.
In addition to this primary service his operations do, in fact, cause prices to approximate more closely to investment values ; they therefore yield a secondary indirect product which appears as a reduction in the amount of Uncertainty falling upon investors in general.
Together these two services reduce the deterrents to the supply of capital, lower its supply price, and reduce the cost of production of business undertakings.