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Unrelated to the criticisms above... Having not reread this essay for a few years, I'd forgotten what a wonderful piece this was. Your exploration of the comm

by tc 17y ago

Unrelated to the criticisms above... Having not reread this essay for a few years, I'd forgotten what a wonderful piece this was. Your exploration of the common fallacies that lead people astray is particularly clearheaded and well supported. However, you might want to reconsider the way you lumped, in passing, speculators together with thieves -- implying that neither create value. Thieves clearly destroy value, whereas speculators add information to markets. They create value in a very abstract way that is difficult to recognize, but is nonetheless there. A speculator that accurately foresees a shortage of grain in 6 months and therefore buys grain futures provides a service to society (by raising the future price of grain over the spot price, causing people to warehouse grain, which will take grain off the spot market, pushing up the spot price, moderating present demand for grain, and preventing an acute shortage).

Luff 17y ago
Technically, thieves redistribute value, they don't destroy it. Speculators, on the other hand, can destroy capital by making bad investments. They can also just get lucky by investing in a rising economy.(thereby not contributing any information of value)
- tc 17y ago
  In the real world, thieves destroy wealth in the process of redistributing. They break windows, they cause people to hire security guards, and their actions make people feel vulnerable and insecure -- all wealth-destroying. The redistribution isn't zero-cost to the thief either. The gas used by the thief to get to his target is destroyed wealth. Thieves also redistribute goods in such ways as to lower their value. Let's say a biotech company pays $20k for a microscope. A thief steals the microscope and pawns it to someone for $20 who just thinks the microscope looks cool. Wealth has been destroyed through the misallocation of resources caused by the improper redistribution. As for speculators destroying wealth by making bad investments: yes, they can, but they lose money when they do so, which is a self-correcting process. The CEO of a company can also destroy wealth by misallocating resources. As for speculators getting lucky: yes, they can do that as well, but random chance tends not to be sustainable (a random strategy will lose on average after transaction fees), causing a self-correction that tends towards mitigating noise. Anyway, if they are lucky and right, they've still added valuable correct information, just as a company that randomly happens onto a successful product still created value. As for speculators getting lucky by investing in a rising market: if the market rise is supported by fundamentals, then the speculators are still adding value by allocating resources towards worthwhile enterprises. What's the difference at that point between speculators and investors? If the rising market isn't supported by fundamental wealth creation (e.g. the central bank is printing money), there will be a correction, and the (long) speculators will lose money. Don't get too tied up on the word information. Market processes allocate scarce resources in such a way as to maximize total wealth and wealth creation (as best as can be done with the information available). Sometimes correct speculation aids that process indirectly by sending price signals. Other times correct speculation adds value by directly allocating resources where they can best be used (investing money in a startup, or in a pool of companies, or in bonds, for example).

by tc 17y ago

Luff 17y ago

Technically, thieves redistribute value, they don't destroy it. Speculators, on the other hand, can destroy capital by making bad investments. They can also just get lucky by investing in a rising economy.(thereby not contributing any information of value)

tc 17y ago
In the real world, thieves destroy wealth in the process of redistributing. They break windows, they cause people to hire security guards, and their actions make people feel vulnerable and insecure -- all wealth-destroying. The redistribution isn't zero-cost to the thief either. The gas used by the thief to get to his target is destroyed wealth. Thieves also redistribute goods in such ways as to lower their value. Let's say a biotech company pays $20k for a microscope. A thief steals the microscope and pawns it to someone for $20 who just thinks the microscope looks cool. Wealth has been destroyed through the misallocation of resources caused by the improper redistribution. As for speculators destroying wealth by making bad investments: yes, they can, but they lose money when they do so, which is a self-correcting process. The CEO of a company can also destroy wealth by misallocating resources. As for speculators getting lucky: yes, they can do that as well, but random chance tends not to be sustainable (a random strategy will lose on average after transaction fees), causing a self-correction that tends towards mitigating noise. Anyway, if they are lucky and right, they've still added valuable correct information, just as a company that randomly happens onto a successful product still created value. As for speculators getting lucky by investing in a rising market: if the market rise is supported by fundamentals, then the speculators are still adding value by allocating resources towards worthwhile enterprises. What's the difference at that point between speculators and investors? If the rising market isn't supported by fundamental wealth creation (e.g. the central bank is printing money), there will be a correction, and the (long) speculators will lose money. Don't get too tied up on the word information. Market processes allocate scarce resources in such a way as to maximize total wealth and wealth creation (as best as can be done with the information available). Sometimes correct speculation aids that process indirectly by sending price signals. Other times correct speculation adds value by directly allocating resources where they can best be used (investing money in a startup, or in a pool of companies, or in bonds, for example).