If there is one word, one dirty slur, thrown across the economic landscape as a scapegoat for our problems it is the term “speculator.” When one gets into the nitty-gritty of what a speculator is, however, those who disparage this special kind of entrepreneur often don’t understand them. Don’t they have a hand in rapid and disturbing shifts in economic trends? Don’t they prey upon valuable commodities just to line their pockets and stuff their wallets with cash? “Why yes,” is the answer to both questions, and thank heavens.
What gives the speculator its name is the fact that he or she “speculates” that a certain commodity, good, or service, will be worth more or less in the future than it is now. Just like merchants and producers take goods from far flung places where they are least valuable, where there is an abundance, combine them into a finished product or move them to an area where those goods are scarcer, speculators perform this economic function on the time scale. Just like there is an arbitrage profit to be made moving goods from one area where they are abundant and into another where they’re more dearly needed, so do speculators take abundant goods in the present and make sure they’re available when times are scarce, with the expectation of profit, of course.
Dwight Schrute, Speculator
Dwight Schrute is a fan-favorite character of the show The Office. He is a neurotic, weird, and obsessive salesman and beet farmer prone to many cringe-worthy moments. However, in two instances that I’m aware of, Dwight performed a valuable service to the Scranton, Pennsylvania economy. In his spare time when he’s not growing beets, he likes to engage in selfish, yet constructive, economic activity. The first was when Dwight cornered the market on unicorn princess dolls near Christmas season. Dwight estimated that the dolls would be the hottest item on the market during Christmas time, and began to stockpile them in the preceding months. Sure enough, Dwight’s estimations were correct. As the stores began to sell out of the dolls, he sold them to desperate fathers who had failed to think ahead. Dwight provided the toys, and gained insane profit margins in return. He does the same a few seasons later by scheduling reservations months in advance at fancy restaurants on Valentine’s Day, and then selling those reservations to couples who had procrastinated on making their own reservations.
Some might think that Dwight created this “scarcity,” himself, however, by buying up the dolls and then selling them when demand was higher. After all, if Dwight didn’t buy the dolls, wouldn’t there be more on the shelves?
Not so fast. Dwight didn’t buy up all the dolls in all of the stores when they were relatively scarce. He did his stockpiling when the goods were abundant. Nearly anybody could have bought those dolls at that time. It was the high demand during Christmas time that led to the products flying off the shelves when Dwight already had these stockpiles. He saved abundant dolls and transported them through time to where the demand was highest. Dwight was alleviating the present scarcity with his surplus of dolls ready to be sold at the right price, to those fathers who desired them most.
It is the same with the reservations. The availability of reservations on Valentine’s Day — were it not for Dwight — might have (and we can deduce probably would have, or he wouldn’t have such high demand for them) ended up in the hands of someone else, and the desperate high-time preference boyfriend in need of a restaurant would have had to settle for McDonald’s. This in itself would impose a high price on the boyfriends in the form of being dumped. If Dwight is the single cause of the present “scarcity” during the holiday season, then so is any other buyer of those dolls at any other point in time (before or during the season). In reality, the later buyers were fortunate that the goods were owned by a speculator like Dwight who was willing to first safely store the goods, and then sell them right when they were needed most.
The Essential Role of the Speculator
“Isn’t that an immoral thing to do?” one may ask. While Dwight is making a killing doing what he does, he’s actually performing a vital economic function. Namely, price discovery and market clearing activities. Not all prices hold steady in all instances across all places and times, and in this situation, Dwight correctly foresaw seasonal changes that made the commodity in question more valuable. In the case of the dolls, Dwight didn’t secure them during times of abundance for himself. He secured them for others, eventually, through sale. The procrastinating fathers had every opportunity during the year to buy the unicorn toy for their children, but didn’t. Had Dwight not done what he did, the holiday season would have come and gone with children across Scranton not getting their stockings stuffed with the toy they so dearly wanted. Retail prices of the dolls across the town’s stores were too low, leading to a shortage of dolls for all those who wanted them. What Dwight did was save a few dolls at a time, or sometimes even bought in bulk from manufacturers or retailers, when demand was low, and saved them for a time when they were more highly valued, as evidenced by the fathers’ desire to pay hundreds of dollars for them. Dwight’s actions coordinated supply with demand.
Similarly, with the reservations, Dwight saw that people’s preferences would change as Valentine’s Day approached. Had any of the “extorted” couples really cared about reserving a spot at a romantic restaurant, they could have easily reserved a spot and saved themselves the trouble of feeling the heat from their girlfriends on not having a special Valentine’s Day due to their laziness or inaccurate foresight. Dwight provides an out for these boyfriends’ procrastination — he correctly predicts the boyfriends’ inaccurate estimate of the future scarcity of available tables at restaurants.
Real World Examples
We can see these effects in the real world today. The Nintendo Switch went for $299 on pre-order, and the pre-orders quickly began to sell out. Many people have already taken to speculation, like Dwight did, and are reserving multiple systems and promising to re-sell them at prices sometimes double what they paid for it. What these speculators are doing isn’t immoral in the slightest — they are making products available for those who demand them the dearest, or have too high of a time preference to wait for them to hit the shelves, or for initial demand to slacken. Time is a valuable resource to many, and the option to have a Nintendo Switch immediately rather than a month or two later is sometimes worth double in the mind of a consumer. The speculator, once again, guarantees the market transaction by discovering the real value and helping to speed price adjustment (in this case, up) to reflect that real value in the eyes of consumers, while also making it available for those who want it most.
There are also speculators who estimate prices will go down. The movie The Big Short showed the effects of speculators who discover an inaccuracy in the market, and sensing that it was about to crash (signaling the 2008 recession) they sold out of their securities at below-market cost. They monetized their estimation and were able to shield themselves from the initial shock of the crash.
But didn’t their activity spark a panic? Wasn’t it the wrong thing to do? No. These investors knew there were fundamental problems and that the securities tied to toxic mortgages shouldn’t have been worth what they were. The resulting downward movement of stock and equity prices reflected the actual conditions that were being hidden by federal-reserve induced monetary foolery. The situation is analogous to a shipmate discovering that the boat is sinking, and quickly alerts the interested parties (everyone else on the ship) to what is going on through the change and reflection in prices so that others can get off the boat. The market was going down sooner or later, and the sooner people know it, the faster can the market adjust to real underlying conditions. Strictly on the immorality of “taking advantage of people who didn’t know the market was going down,” one must remember that for every short sale there is a “long buy,” or someone who thinks they’re getting a bargain by purchasing those mortgage-backed securities below market value. In fact, it was these “long buys” based on faulty price information that helped to pump up the asset bubbles in the first place. The short sale was an honest reflection of conditions that were going to reveal themselves anyway.
When the Speculator Is Wrong
This might be all well and good, you say, but what if the speculator is wrong? What if Dwight misjudged the market for dolls or the financial marketeers in The Big Short incorrectly evaluated their mortgage backed securities? The question brings to light the third function of the speculator: taking risk upon themselves. If Dwight didn’t correctly foresee that the price of dolls or restaurants would go up, then Dwight would be the only one out of luck. For instance, the retail stores already made their sales of dolls (to Dwight) and are thus shielded from having to manage their inventory and possibly take a loss on what might have been an over-hyped product. In this instance, Dwight would have to lower the price and unload the dolls, this time coordinating the supply with a lower demand. If The Big Shorters were wrong about the underlying sickness of the financial sector, some speculator would of course buy the securities at the shorted price, and perform an arbitrage which would push the price back up to the market level. The bearing of risk also highlights and underscores the term “speculator,” because if the future prices were absolutely known, there would be no speculation, no uncertainty, and risk. Such a world in reality doesn’t exist, and so speculators take the risk upon themselves, knowing the whole time that their action could result in a large profit for themselves, or a crippling loss. The speculator alone, through his action, burdens himself in search of gain. In fact, anyone who engages in economic action is in some form or fashion a speculator.
The “speculator” brings to mind a devious, villainous, slimeball of a person, like Dwight Schrute, in the minds of many who haven’t studied economics and are looking for someone to pin market-wide woes on. However, it must be remembered that Dwight as a speculator performs three vital and important functions in his speculation for higher profit: One, that prices adjust sharply and as quickly as possible to reflect the real values of the marketplace so that further mistakes can be avoided; two, that goods are transported from times of abundance when the tendency to consume frivolously is higher to times when those goods are scarcer and needed for more highly valued functions; and three, bearing risk. The speculator is an economic hero. It is through their insatiable desire for a quick buck that they actually act as a stabilizing force in the economy. Should prices not reflect the real values on the market and surpluses or shortages appear on the horizon, the speculator is always ready to swoop in and align supply with demand. This is a vital action that alerts the rest of the economy through price signals to changes it needs to be aware to. So here’s to Dwight: schizophrenic, spectacled, socially awkward, and speculative hero of The Office.
