There seems to be a huge misconception among people about speculators and speculation. According to most of the people speculators serve no real function to an economy. Recently a reader commented this on our blog.

Lemme explain you why speculation is an indispensable function in Free market, in fact without speculation you might as well call it a Socialist economy.

In fact this reader’s comment is quite similar to what Lenin wrote in his work Imperialism:

The greatest success no longer goes to the merchant whose technical and commercial experience enables him best of all to estimate the needs of the buyer, and who is able to discover and, so to speak, ‘awaken’ a latent demand; it goes to the speculative genius who knows how to estimate, or even only to sense in advance, the organizational development and the possibilities of certain connections between individual enterprises and the banks. .

Lenin clearly does not understands the function of enterprises and banks.


Scenario One: Grandma Inc
Lets say your grandma has a home industry of producing clothes. When summer comes she starts to make the summer clothes, but by the time she finishes it, summer is gone and people don’t want to buy summer clothes, same happens with winter clothes. I know its pretty obvious for anyone to start making summer clothes in winter and winter clothes in summer, but for the sake of example lets consider she is really that naive.

What you do is, you tell her to start producing summer clothes in winter and winter clothes in summer.

She does that and she starts to make good profit. Now lets say she is not your aunt, and one of the thousands of workers who are all that naive to understand a simple fact. You cannot go to them individually and explain this to them. Plus they find producing summer clothes in winter to be too risky. At the end of the day you simply cry over this fact, and demand govt to educate more and more people or something like that.
Or what you do is, you take loan from a bank, buy all the summer clothes produced in winter by these naive workers, and put it in your warehouse. Next summer you take these clothes out and sell them, meanwhile buying all the winter clothes the workers have produced.This way you make some good profit and you provide livelihood to the people. People do understand this function no doubt about it.

Scenario Two: Clothes Speculator
Lets take a slight deviation of this scenario. Instead of you going out and buying all the summer clothes in winter, and storing them in your warehouse you do the following.
You go and buy the ownership document of all the summer clothes, but you do not really take the physical delivery, basically you pay the workers for their clothes, but tell them “I will come and take those clothes this summer, just hold them for me”. Next summer you simply sell the ownership document of those summer clothes to the retail traders and ask them to collect it from the workers.
NOW YOU HAVE BECOME A SPECULATOR WHOM PEOPLE REALLY HATE.
You merely speculated on the value of summer clothes by buying them in winter and selling them in summer. You did not take the physical delivery of them, rather merely the title ownership of the goods.
My simple question is, what is the big difference between the two, both are doing pretty much the same thing, so why so much despise for the speculators?


Scenario Three: Worker’s Cooperative
Now comes the issue of stock speculation(or any commodity, or futures speculation).

Let’s say you wanna setup a company for making shoes. You need massive investment capital for that. In Socialism you can simply go to lord Kuber and ask for the money, but in real world, in any scenario you need SAVINGS!
How?
Let’s say you gather 1000 workers, and ask them to be equal partners in setting up the factory. In an ideal world, they all work without wages, they acquire clay and create bricks and cement, and build the factory, they make the machines by drilling steel from the earth.And the end, once the profits starts to pour in 3-4 years later(very conservative presumption) they finally get their wages equally shared among them. Lemme warn you, till this time, NONE OF THE WORKERS had any other income. So they all had to rely on their previous SAVINGS to feed their family. Here the workers are the Capitalist who invested their savings in this factory.


Scenario Four: Worker’s Cooperative - Investor Edition
Lets take another scenario where the workers aren’t having any savings, they will die of hunger if they did not earn something soon. So now one of the worker comes to their rescue who SAVED a LOT, over the years. He says, “I will feed your families till the factory is built completely, but since I kept my savings for some blue day, so you give me back my savings from your shares once the factory is built completely and is making profit.”
Everybody agrees for this factory, but then it does not happen in every case. Not all the workers with lots of savings are willing to give up their savings as an investment with zero returns. So workers find out a solution for this, they Hold the gun on the head of whichever worker has the savings, and ask him to invest in.
OR
Without holding a gun there is only one way to make people put in their savings and that is, they REWARD any worker who puts his savings in.So now in workers have an incentive to SAVE, and invest their SAVINGS into the factory and get a reward of increasing their savings. These workers who have savings are now the CAPITALIST investors in the factory.


Scenario Five: Worker’s Cooperative - Capitalist Edition
Now take ANOTHER scenario. Not in every case for a factory the workers have enough savings, or ONE worker has that much savings. BUT there are some other workers out there, who have invested in some clothing factory and got a big return on their savings.
Take for example, there are worker A, B, C and D who have big savings to start a new factory, they have already put their capitals and made their savings more from Shoe, clothes, cement and brick factories respectively. But the society needs much more factories than that, and people just do not have savings. Of course the investment capital of A,B,C and D could be used in other fields, but then A does not wanna work in any other factory other than in a shoe factory. So the workers of a prospective car factory, allow A to invest his capital in this factory and give him a share of the factory ownership, WITHOUT even working in the factory for real.
It sounds very immoral to a lot of people, but in a just society, this is the only way more products can be produced, otherwise suffering awaits.
Just like A, now any worker with savings capital can now buy the shares of a new factory by putting his investment capital in the factory.


Scenario Six: Stock Market Speculation
The workers working in the factory now wanna change their jobs, they don’t wanna be in that factory, it could be for all sorts of reasons. The factory decision making board is not performing well, or according to how a worker thinks is the best way for the factory, the worker is dissatisfied with the performance of the factory.
Or he simply wants to change his job or field of work.
But what about his investment of savings in the factory now? Instead of devoid him of his savings, the workers of that factory decide to allow him to sell his shares of the factory to anyone who wants to work in the factory, or who thinks the factory is going in the right direction. So the people who own the shares of the factory, or the “shareholders” are allowed to sell the shares of any factory they own.
They unite at one place and sell and buy the shares or the partial ownership of capital goods. They call this place as “Share market”. Some Capitalist, simply bring their savings into the market, and try to invest in a company they think is going to do a lot of production.

Some simply buy and sell shares of various factories based on what they think will happen in future, and make profit on this basis.

One Shoe factory board thinks installing GPS devices in every shoe is a good feature, but the speculator thinks otherwise he thinks its going to be a disaster in terms of sales because of increased price. So he short sells the shares of that factory bringing its price down and buys it back by making heavy profits. The investors find out why the shoes stocks went down, realize that GPS device is a bad idea so their sell their stocks and the shoe factory runs out of money for this clearly stupid venture.
Even if the idea in reality might be a genius idea, now the shoe board has to find someone who actually is willing to risk his OWN money on such a venture.

All these things happen in only a purely voluntary society.