Journal of Business Ethics (2009) 90:277–286  Springer 2010

DOI 10.1007/s10551-010-0421-5

James J. Angel
The Ethics of Speculation Douglas M. McCabe

ABSTRACT. Recently there has been an outpouring of socially useful speculation may have an ethical dark side.
consumer frustration over rising food and energy prices. Does such speculation cause damage by adding excess
Many politicians railed against ‘‘speculators’’ who alleg- volatility to prices? Speculators may contribute to price
edly drove up the prices of key necessities. Is speculation bubbles. At what point does legitimate speculation
unethical? This article reviews the traditional arguments become odious ‘‘price gouging?’’ We also draw an ethical
against speculation. Many of the standard criticisms con- distinction between speculation, which seeks to benefit
fuse speculation with gambling. In much the same way as from changing prices, and manipulation, actions taken to
ethicists now draw distinctions between usury and normal push prices away from their economically appropriate
business interest, we draw a distinction between socially levels.
useful speculation and gambling. Gambling involves
taking on risk with no plausible expectation of making a KEY WORDS: Ethics, speculation, gambling, manipu-
profit. Gambling may provide entertainment value to lation, price gouging
some people, but like other addictive activities causes
grave harm to a subset of users. Speculation involves
taking on a business risk with a plausible expectation that Introduction
a profit will result. Speculators provide an important risk
bearing service by taking on risks that others do not want. The recent spikes in energy and food prices have
They help markets to function better by helping to sparked a chorus of outcries against speculation. In
incorporate information into prices as well as providing 2008, numerous bills were introduced in the U.S.
liquidity. Speculators may actually reduce shortages by Congress with the intent of reigning in ‘‘excessive
causing quicker price increases that motivate producers to speculation.’’1 Prime ministers and Presidential
increase production and consumers to conserve. But even candidates railed against speculators.
This contempt for speculators is not new. Aris-
totle (1981) referred to gains from speculative trad-
James J. Angel is an Associate Professor of Finance at George- ing as ‘‘unnatural’’ and ‘‘justly censured.’’ He then
town University’s McDonough School of Business. His went onto give an example of how a philosopher,
research focuses on the operation of financial markets around Thales the Milesian, proved that he could make
the world. He has served as Chair of the Nasdaq Economic
money. Thales expected a large olive harvest; so he
Advisory Board and has been a member of the OTCBB
Advisory Board. He earned his undergraduate degree from the
gained control of all the olive presses in the region
California Institute of Technology, his MBA from Harvard before harvest time. When the large harvest came in,
Business School, and his Ph.D. from the University of pushing up demand for the presses, he rented them
California at Berkeley. He is also a CFA charter holder. out at high prices.
Douglas M. McCabe is a Professor of Management at In 1468, Nider (1966) blasted speculators in De
Georgetown University’s McDonough School of Business, Contractibus Mercatorum, one of the earliest treatises
Washington, D.C. He serves on the Editorial Boards of 20 on business ethics:
scholarly journals, including the Employee Responsibili-
ties and Rights Journal and the Journal of Workplace However, it is clear that business dealers who neither
Rights. He is the 2007 recipient of the Labor and transport nor conserve, nor by their industry improve
Employment Relations Association’s Excellence in Education things for sale, are blameworthy and stand properly
Award. He holds a Ph.D. from Cornell University and is a removable from the commonwealth. Such people do
member of the Phi Beta Kappa. not give an unequivocal assurance concerning the
278 James J. Angel and Douglas M. McCabe

value of goods but merely buy in order to sell without those commodities. Critics claim that speculators do
performing the arduous duties mentioned above. not produce anything useful, and are thus parasites
upon society.
Ryan (1902) found speculation to be ‘‘morally
In the second section, we discuss some of the
questionable’’:
benefits of speculation. Speculators perform several
Every man who yields to the seductive temptation to very useful economic purposes. First, they provide
speculate feeds the passion of avarice, strengthens the risk bearing capacity, much like insurance compa-
ignoble desire to profit by the losses of his fellows, nies. This makes it easier for producers and con-
cultivates a dislike for honest, productive labor, and sumers to hedge their risks, and thus make producers
exposes himself to financial ruin. willing to produce more. Second, they bring infor-
mation to the market, potentially making prices
Criticism of speculators comes from all sides of more accurate. Third, their willingness to buy or sell
the political spectrum. Both Vladimir Lenin and purely on price brings liquidity to the market,
Abraham Lincoln stated bluntly that speculators making it easier for pure hedgers to hedge and
should be shot (Jacks, 2007). reducing the transactions costs involved in hedging.
Despite these condemnations, speculation – and Many of the criticisms of speculation stem from a
the criticism of it – has continued to the present day. confusion between speculation and other activities.
This is not a black and white issue, as speculation is In much the same way as it is now common to draw
an important part of our modern business culture. In a distinction between normal interest and usury, we
this article we examine various criticisms of specu- also draw ethical distinctions between speculation
lation and draw an ethical distinction between and other activities. In the third section, we draw a
speculation and other activities such as price distinction between speculation and gambling. A
manipulation, gambling, and price gouging. speculator has a plausible expectation of making a
First, we need to define the term ‘‘speculation.’’ profit, while a gambler does not.
We define speculation according to the common Speculation is often conflated with manipulation.
usage. For example, Merriam-Webster (2008) de- The fourth section distinguishes between speculation
fines the word speculate as and manipulation. Manipulators actively attempt to
to assume a business risk in hope of gain; especially: to divert market prices away from their proper eco-
buy or sell in expectation of profiting from market nomic values, imposing severe losses on others.
fluctuations. In the fifth section, we discuss the difference be-
tween speculation and price gouging. When normal
This is a slightly broader definition than Kaldor’s market competition is absent, gougers may take
(1939) widely cited definition: advantage of desperate people in their time of need.
In the sixth section, we attempt to draw a dis-
… the purchase (or sale) of goods with a view to re-
tinction between speculation and excessive specula-
sale (re-purchase) at a later date, where the motive
behind such action is the expectation of a change in
tion. Is it possible to have too much of a good thing?
the relevant prices relatively to the ruling price and not Without manipulation or other odious activities, is it
a gain accruing through their use, or any kind of possible to have too much speculation? It can when
transformation effected in them or their transfer be- speculators engage in herd behavior and push prices
tween different markets. to extremes that are not justified by economic fun-
damentals, even when there is no explicit conspiracy
Note that both definitions include common to manipulate. Furthermore, situations in which
examples of speculation, such as that of an investor speculators do not assume the full risk of their
who purchases gold today with the intent to sell it speculation are also harmful.
later at a higher price. Our last section concludes. Speculation by itself is
In the first section, we discuss some of the com- often a socially useful activity, but it is often con-
mon criticisms of speculation. Critics accuse specu- fused with activities such as gambling, price
lators of distorting market prices through their manipulation, and price gouging. The potential for
activities, and thus harming those who depend on harm is one of the reasons that speculative markets
 The Ethics of Speculation 279

such as futures markets are highly regulated, and purchasers of a commodity then its price will go up.
regulators have an explicit mandate to target There is no doubt that higher prices for vital com-
manipulation and excessive speculation. modities have a disproportionate impact on the
poor. During a period of shortage, markets use prices
to ration scarce resources. In this way, scarce re-
sources are allocated to those willing to pay the most
Criticisms of speculation for them. This avoids the inefficiencies associated
with other rationing schemes, such as long waiting
This section contains a number of the standard lines, or corruption. Although using price to ration
criticisms of speculation. scarce goods maximizes economic efficiency, the
poor are the ones who suffer the most when high
prices are used to ration scarce necessities.
Speculators produce nothing However, it is by no means proven that specu-
lators drive prices above their true value. While
Slater (1912) criticizes speculators: market prices sometimes (with the benefit of 20–20
Hence, producers and consumers are robbed by clever hindsight) overshoot fundamental values, this can
men, who manipulate the markets in their own occur even in the absence of price-driven specula-
interest, produce nothing, perform no useful social tors. Indeed, because speculators have a strong
service, and are parasites on commerce. incentive to buy when the price is low and sell when
it is high, they should have a stabilizing influence on
This criticism is pretty straightforward: Speculators the markets.
who, for example, purchase grain and soon sell it at a
higher price have not actually produced any grain.
Indeed, their role as middlemen between producers Speculators drive down the prices of commodities below
and consumers implies that consumers pay more and their true values and thus hurt producers
producers get less than they should. This is essentially
a tax that imposes a deadweight cost on society. Since Just as speculators can make money by betting that
the farmers are paid less, they will produce less. prices go up and being right (or lucky), they can also
This argument is fundamentally flawed in that make money by betting that prices go down and
speculators do provide a useful service, that of risk being right (or lucky). If speculators in the aggregate
bearing, just like insurance companies. They make it are pessimistic, then their sales will depress prices.
possible for other market participants to get rid of, or When prices are falling, speculators are a natural
hedge, risk that they do not want to bear. We show target for criticism. However, the same rebuttal
in the next section that the ability to hedge risk may applies as when speculators are accused of inflating
motivate some producers to produce who otherwise prices. It is by no means proven that speculators are
might not be willing to because of the risk. the cause of a particular price drop. Because specu-
lators have a financial incentive to move prices in the
direction of their fundamental value, they should be
Speculators drive the prices of vital commodities above a stabilizing force on prices.
their true value and thus hurt the poor

Pope Benedict XVI (2008) criticized the ill effects of Speculation is just gambling
speculation when he discussed ‘‘…the needs of the
weakest and poorest people whose vulnerability to- Both speculation and gambling involve the inten-
day has increased because of financial speculation tional assumption of risk and are often confused.
and instability and their pernicious effect on the Gambling has been condemned for centuries as an
price of foodstuffs and energy.’’ addictive behavior that distracts participants away
Clearly, any trading in a commodity affects its from other productive activities. By allowing gam-
price, and if speculators in the aggregate are net blers to bet on vital commodities, one runs the risk
280 James J. Angel and Douglas M. McCabe

that their gambling activity will affect prices in Speculators are often blamed for exacerbating
pernicious ways that are unjustified by economic these bubbles. Because speculators often bet on
fundamentals. As we discuss in a later section, future price movements without ever actually
speculation is very different from gambling because owning the actual commodity, they can add fuel to
the speculator at least has some plausible reason for the fire. There are many anecdotes from the recent
making money. U.S. housing bubble of flippers buying houses while
putting up very little of their own cash in the hopes
of making a profit from quick resales (e.g., Lahart,
Speculators add volatility to the market 2007). When their bets went sour, they just walked
away from the loans on their properties.
Market prices are often naturally volatile. Prices Indeed some speculators clearly contributed to
can and do respond quickly to news regarding these bubbles. However, that does not mean that
supply and demand in a market. Weather shocks, speculation by itself creates bubbles. Once again,
work stoppages, political events and more can speculators have an incentive to speculate against
quickly move prices. Speculators are sometimes bubbles.
criticized for contributing to market volatility.
Their willingness and ability to trade quickly based
on hunches and rumors may have a destabilizing Benefits of speculation
impact on prices. On the other hand, if prices
move away from their fundamental values, specu- Speculators provide risk bearing capacity to the economy
lators have a strong financial incentive to move
prices back towards those levels. And yet some Although sometimes speculators trade with other
speculative strategies may also exacerbate volatility. speculators who have different opinions, often they
Suppose speculators buy a commodity, hoping to trade with producers or consumers of a product who
sell later at a higher price. If in the aggregate they are trying to hedge their risk. The classic example is
wait until it is clear that the peak of prices has that of the wheat farmers who suffer considerable
passed and the commodity is in a downward trend, risk when they plant their crops. Prices at harvest
they will be selling into the downward trend and time could be almost anywhere. In order to reduce
accelerate the fall in price. Whether speculation in their risk, they can lock in the price they will get at
the aggregate affects volatility is an empirical harvest time by agreeing in advance to sell the crop
question. Jacks (2007) examined cases in which at a fixed price to a speculator. The farmers thus
certain futures markets in the U.S. and Germany know exactly how much they will receive for their
were banned, and found that the bans actually crop and can attend to the business of farming
increased volatility. without worrying about price fluctuations that occur
long after they have planted the crop in the ground.
In the way, speculators act like insurance com-
Speculators contribute to speculative bubbles panies providing a risk reduction product to the
farmers: They guarantee that the farmers will receive
Markets – like any human institution – sometimes a specific price for their crops. The speculators
make mistakes. There is a long history of speculative presumably have the capacity to absorb the risk, and
bubbles in financial as well as nonfinancial markets in thus the risk is transferred from the farmers who do
which prices reached absurd levels that, in retro- not have much desire to carry this risk to other
spect, were not justified by economic fundamentals. parties that can bear the risk.
There are many colorful stories, including the
famous Dutch tulip bubble in the 1630s, the South
Seas bubble, and extending up to the current day Speculators make more production possible
with the internet and housing bubbles. The collapse
of such bubbles is often accompanied by widespread Indeed, the risk bearing that speculators bring to the
economic pain.2 market may actually increase the output of society.
 The Ethics of Speculation 281

Consider the case of an oil producer with an old makes them a natural stabilizing force in the markets.
declining oil field. At current prices, it would be Friedman (1953) argued that speculators who trade
economically feasible to invest in expensive tertiary in stabilizing ways make money, and those who
recovery methods to get more oil out of the ground. don’t – lose money. Thus, speculation should have
However, oil prices are notoriously volatile and can an overall stabilizing effect.
go down as well as up. The producer may not be
willing to take on the investment because of the
price risk involved. However, if the producer can Speculators make it cheaper for producers and consumers
sell the oil in advance to a speculator at a fixed price, to hedge
the producer can get rid of the price risk and lock in
enough of a profit to make the investment worth- The existence of speculators in a market makes it
while. In this way, speculators really do produce easier for producers and consumers who want to
something because their risk bearing motivates hedge to find someone to trade with. Competition
others to produce more. from speculators for their trades also reduces their
Furthermore, the impact of speculators on price transaction costs and helps them to get better prices.
can also increase production. If speculators rightly
foresee a shortage and bid up the price, then this
sends a signal to the producers to produce more. Speculation and gambling
When farmers see higher prices for grain, they nat-
urally produce more. We draw a very important ethical distinction
between speculation and gambling. A speculator has
some plausible reason – at least plausible to the
Speculators bring information to markets and make speculator – as to why the speculator will make
prices more informative money as a result of the risk undertaken. A gambler
does not. A gambler takes on risk for the enter-
Another extremely valuable service provided by tainment value, while presumably knowing that on
speculators is that of making a market system more average the gambler will lose. Our position is very
efficient. When speculators trade, they reveal some different from that of Borna and Lowry (1987) who
of their information to the market, which affects the assume that ‘‘‘speculative business’ practices and
price. Indeed, they have a very strong financial gambling are similar in ‘nature’.’’ While they may be
incentive to make sure that they have – and trade similar in terms of risk, they are certainly not similar
upon – good information about the price. Their in terms of intent. A speculator rationally intends to
information is thus incorporated in prices, ensuring make money. A gambler may want to make money,
that market prices reflect all of the information but they cannot rationally expect to do so in most
available. Prices send the signals to consumers about gambling environments. There are a few exceptions
how much to consume. When the price goes up, where players with exceptional skill can make
they consume less, and when price goes down, they money, such as professional poker players or black-
consume more. Prices also send signals to producers jack card counters. However, the laws of probability
about how much to produce. Likewise, an increase dictate that on average players of roulette and slot
in price sends a signal to produce more and a machines will lose.
decrease to produce less. By making sure that prices Society’s views on gambling have evolved
contain good information about supply and demand, between utter prohibition and a grudging regulated
speculators help to make markets more efficient. acceptance (Clotfelter, 1989). The argument against
gambling is pretty straightforward. Gamblers spend
time and resources that otherwise could be spent in
Speculators can stabilize prices other activities. Compulsive gamblers are addicted to
gambling and sometimes cause great misery to
Speculators have a strong incentive to buy when themselves and their families. Occasionally they
prices are low and sell when prices are high. This resort to crime to indulge their addiction. Casinos
282 James J. Angel and Douglas M. McCabe

also encourage their patrons to engage in other risky on the Chicago Mercantile Exchange.5 The perpe-
activity such as drinking in order to get them to trators controlled 98% of the onion crop that could
gamble more. The ‘‘get rich quick’’ allure of gam- be delivered against the onion futures contract. They
bling distracts individuals from more productive then took an even larger short position in onions,
value creating opportunities. For example, an intel- such that they would make money if the price of
ligent person may choose to be a professional poker onions fell.6 They then shipped their onions out of
player rather than start a productive enterprise. Chicago, repackaged them, and shipped them back
However, many of the legal prohibitions against into Chicago to make it look like large quantities of
gambling disappeared in the late twentieth century. onions were arriving in the city. The prices of
Many states instituted lotteries and legalized casino onions plummeted as a result. In another scandal,
gambling. The argument for legalized and regulated manipulators managed to get control of all of the
gambling is that it is an entertainment activity similar freight cars that could bring onions into the city,
to going to the movies. Yes, some people abuse it, just thus causing a temporary shortage that caused prices
as some people abuse alcohol or drive too quickly, yet to skyrocket and then collapse.
that is not sufficient justification for depriving Such manipulations cause great harm to many
everyone of a pleasant recreation opportunity.3 Fur- people. Innocent farmers are hurt by the collapse of
thermore, governments obtain substantial tax revenue the price for their crops. The actions needed for the
from legalized gambling, although some would de- subterfuges were a wasteful and unnecessary use of
bate whether the additional revenue fully offsets the transportation and labor resources. Legitimate mar-
social costs imposed by increased gambling. In addi- ket makers also lost heavily as a result.
tion, gambling led to the development of many of the Manipulations damage the reputation of markets,
mathematics tools of statistics and probability, which with harmful impacts on the economy. The markets
are extremely useful in many fields. Gambling become less useful for those who actually wanted to
examples are commonly used to teach probability hedge their risks to engage in legitimate speculation.
even today. Indeed, the public outrage over scandals in onion
Some speculators are also gamblers. Indeed, futures was so great that in 1958 the United States
financial markets can be used to gamble as well as to banned trading in onion futures, a ban which extends
speculate. This is one of the many reasons that to this very day.7 Economic studies of the onion
financial markets are highly regulated. For example, futures ban generally find that the volatility in onion
FINRA suitability rules require brokers to only futures actually increased after the ban, providing
recommend ‘‘suitable’’ investments to their clients.4 further evidence that permitting speculation in futures
However, the fact that a product can be misused markets actually decreases volatility (Jacks, 2007).
does not make other legitimate uses unethical. For The damage from manipulation can be more than
example, the fact that a knife can be used to kill economic. In 1986, rat poison was placed in Contac
someone does not make it wrong to use a knife to cold capsules in an attempt to bring down the stock
slice a loaf of bread. The issue here is whether the price of SmithKline Beckman, the manufacturer of
entry of gamblers who are trading for pleasure in- Contac (Kristof, 1986). The perpetrator was caught
stead of profit destroys the social utility of a financial and later convicted because his options trading just
market. This brings us to the concept of ‘‘excessive before the poisoning aroused the suspicions of other
speculation’’ which we will address later. traders.
Clearly, manipulation is an unethical practice.
However, most speculative transactions are not
Speculation and price manipulation manipulative. The ability to speculate does, how-
ever, create an incentive for manipulation. By
Speculators are often accused of manipulating prices. manipulating, a speculator can help to achieve the
Here we define manipulation as taking actions de- desired profit. However, this temptation does not in
signed to move prices away from prices justified by and of itself make speculation unethical. There are
economic fundamentals and to profit from the dis- many useful tools that also create temptation for
ruption. A classic example of manipulation occurred wrongdoing. As with gambling, the existence of the
 The Ethics of Speculation 283

threat of manipulation is another of the reasons for too much insurance? How can we not want every
the careful regulation of financial markets. bit of information to be reflected in price? Is there
anything wrong with keeping transactions costs for
legitimate hedgers down?
Speculation and price gouging Much of the recent outcry and (proposed legis-
lation) has been over ‘‘excessive speculation.’’ Alas,
From time to time there are reports of sellers ‘‘excessive speculation’’ is hard to define. Indeed, the
charging prices far beyond the standard market price laws proposed in 2008 seeking to reign in excessive
for the commodity. When there are natural disasters, speculation did not even attempt to define it, just put
many are outraged when food, water, and fuel are limits on trading other than ‘‘legitimate’’ hedging. It
sold at astronomical prices. One of the earliest appears that the critics are seeking to prevent spec-
examples of price gouging occurs in the book of ulation that creates harmful outcomes, such as prices
Genesis, in which Jacob takes advantage of Esau’s that deviate from a perceived appropriate value or
famished condition and buys Esau’s birthright in prices that fluctuate excessively.
exchange for a bowl of soup.8 Curiously, Jacob is No human institution is perfect. Just as an indi-
not punished for this but actually gets away with it. vidual can make mistakes, so can groups of indi-
Although many would criticize such price goug- viduals. In particular, from time to time bubbles arise
ing as taking unfair advantage of people’s distress, in markets. Bubbles tend to occur for a number of
others point out that the ability to gouge creates reasons through various cognitive biases in inves-
incentives for entrepreneurs to get the scarce com- tors.9 Often there are favorable economic conditions
modity to the place where it is most valuable. and a plausible story, such as a great new techno-
However, the standard free market argument gen- logical innovation. Generally rising prices lead to an
erally assumes that markets are working with natural expectation of even more rising prices, which is
competitive forces at play. In times of disaster, this known as adaptive expectations: people naturally
assumption is often void. A gouger has a local expect trends to continue. Furthermore, the natural
monopoly on the scarce commodity and exploits this instinct of humans is to go along with the crowd.
monopoly. Gougers violate social norms that dictate Speculators tend to confuse their own good luck
that one should help out in times of disaster, not seek with skill, and become overconfident in their
to profit from them. investing skills. Overconfidence, adaptive expecta-
Although speculators may sometimes gouge, tions, and herding combine to form a bubble.
speculation is not the same as price gouging. Indeed, Eventually the market becomes overheated and
not all price gougers are speculators. Someone who overshoots values appropriate with economic fun-
just happens to have some extra flashlight batteries damentals, and the bubble eventually bursts.
may choose to sell them at a very high price during a Alas, it is hard to criticize many bubble partici-
power failure. Indeed, a speculator, seeing that prices pants on ethical grounds, as they often have plausible
for future delivery have overshot their true value reasons for their actions, which could even be
during a shortage, may actually contract to sell the beneficial to society. For example, in the recent oil
commodity for future delivery, thus bringing the bubble, an investor who believed that we have
price closer to its fundamental value. Thus, during mined most of the easy-to-extract oil on the planet
the recent spike in oil prices, speculators who and that global demand would continue to increase,
shorted oil futures during this time helped to alle- may have legitimately believed that the value to
viate the price pressure. society of extracting another barrel of oil from the
ground would soon hit $200. By purchasing oil and
pushing the price up, the speculator was sending a
Speculation versus ‘‘excessive’’ speculation strong price signal to consumers to use less oil and to
entrepreneurs to produce more alternative energy. It
Given the beneficial aspects of speculation, is it is only later with the benefit of 20–20 hindsight that
possible to have too much of a good thing? How can the crowd comes to its senses and realizes the gross
we possibly have too much risk bearing capacity or inaccuracy of its collective forecast.
284 James J. Angel and Douglas M. McCabe

Can ‘‘excessive’’ or ‘‘harmful’’ speculation only kets are not always perfect, and severe economic
be determined in hindsight? Perhaps. But some damage can follow the collapse of a bubble. Like-
forms of speculation are clearly harmful to others. In wise, the failure of both centrally planned economic
particular, it is harmful when a speculator manages to systems along with numerous government price
transfer the risk of loss onto unsuspecting parties control programs in market economies during the
without their consent. Consider, for example, the twentieth century also indicates that governments
case of a house flipper who buys a home with no generally have a poor track record when they try to
money down. If the house goes up, the flipper manage prices. Yet reasonable limits on the amount
retains all the profit. If the house goes down, the of leverage used in speculation can contain the
flipper walks away from the house, sticking the loss damage from bets gone bad.
to the lender. It is one thing if the lender understood
the risk. However, in the recent housing bubble it is
clear from the extent of the losses that many of the Summary and conclusion
ultimate lenders did not fully comprehend the risk in
their lending activities. The failure of these lenders Speculation is the act of taking on a business risk in
also imposed damages on numerous others in the the hope of making a profit. Speculation and spec-
economy. ulators have been criticized for centuries. They have
Such a risk transfer can occur in almost any highly been called parasites because they produce nothing
leveraged situation, whether the speculator is an and profit from the labors of others. They have been
individual or a hedge fund. The failure of highly accused of distorting prices and thus harming both
leveraged institutions can also cause other institu- producers and consumers.
tions to fail, igniting a chain reaction of failure Speculation is often confused with gambling, but
through the economy. Thus, one way to define a it is distinct. Gambling is taking on risk without an
form of excessive speculation is speculation in which expectation of a commensurate profit, while spec-
speculators have managed to transfer risk to other ulators have a plausible expectation that they will
unwitting participants through the use of borrowed profit. Speculation also has many beneficial eco-
money. nomic benefits. Speculators provide important risk
Compulsive gambling disguised as speculation is bearing capacity that takes away risks from producers
also a form of excessive speculation. Trading by and consumers, and can thus encourage production.
compulsive gamblers can be particularly injurious to Speculation is similar to many other human
markets because gamblers may be trading based on behaviors. Although it has many beneficial aspects, it
their compulsion, not their information. Their trades also has an ethical dark side. Some speculators do
may distort prices away from their fundamental engage in unethical activities such as price manipu-
economic values and send false price signals to lation. When pathological gamblers use markets for
producers and consumers. Gamblers who have lost their gambling urge, they may distort prices far be-
money may be tempted to ‘‘double down’’ and in- yond their true level. As with other human activities
crease their bets in attempts to win back their losses. it is possible to take a good thing too excess. For
This increases their losses, with potentially devas- example, speculators may exacerbate bubbles in
tating consequences to themselves, their employers, markets.
and the community around them. In many ways our distinction is similar to that
What, if anything, should be done about the often made between the charging of business interest
natural tendency of humans to engage in speculative and excessive interest, which is usury.10 Business
bubbles is a matter of debate best left to other ven- interest has many legitimate uses that further eco-
ues. Exactly how and when the government should nomic growth, while predatory lending is unethical.
call out the market riot police to attempt to quell an Legitimate speculation helps the economy to grow,
irrationally exuberant bubble is a tricky question. while excessive speculation can exacerbate harmful
The evidence from past bubbles indicates that mar- price bubbles.
 The Ethics of Speculation 285

Notes Clotfelter, C. T.: 1989, Selling Hope: State Lotteries in

America (Harvard University Press, Cambridge).
1 Coyne, M. P. and J. M. Traflet: 2008, ‘Ethical Issues
To be precise, a search of thomas.loc.gov indicates
over 25 bills were introduced in the 110th Congress Related to the Mass Marketing of Securities’, Journal of
with language referring to ‘‘excessive speculation.’’ Bill Business Ethics 78(1–2), 193–198. doi:10.1007/s10551-
titles include ‘‘End Oil Speculation Act of 2008,’’ ‘‘Stop 006-9319-7.
Excessive Energy Speculation Act of 2008,’’ ‘‘Over-the- Ferguson, N.: 2008, The Ascent of Money: A Financial
Counter Speculation Act,’’ and ‘‘Prevent Excessive History of the World (Penguin Press, New York).
Speculation Act.’’ FINRA: 2008, FINRA Manual, Rule 2310, http://
2 finra.complinet.com/en/display/display_main.html?rbid
See Mackay (1995), Chancellor (1999), Kindleber-
ger and Aliber (2005), and Malkiel (2008) for descrip- =2403&element_id=3638. Accessed 12 Jan 2008.
tions of some of the more famous bubbles. Friedman, M.: 1953, ‘The Case for Flexible Exchange
3 Rates’, in M. Friedman (ed.), Essays in Positive Eco-
Many of the issues here are similar to those
involved in other risky activities. See Coyne and Traflet nomics (University of Chicago Press, Chicago).
(2008). Geisst, C. R.: 2002, Wheels of Fortune: The History of
4 Speculation from Scandal to Respectability (John Wiley and
FINRA (2008) Rule 2310. FINRA is the Financial
Industry Regulatory Authority, the self-regulatory orga- Sons, Hoboken).
nization that polices brokers in the United States. Jacks, D. S.: 2007, ‘Populists Versus Theorists: Futures
5 Markets and the Volatility of Prices’, Explorations in
See Time (1956) and U.S. Congress (1957) for
more juicy details. For details on this and other scan- Economic History 44, 342–362.
dals, see Geisst (2002). Kaldor, N.: 1939, ‘Speculation and Economic Stability’,
6 The Review of Economic Studies 7(1), 1–27.
In a futures contract, the party that agrees to buy
the commodity for delivery at some point in the future Kindleberger, C. P and R. Aliber: 2005, Panics, Mania,
is ‘‘long’’ and the party that agrees to sell the commod- and Crashes: A History of Financial Crises, Wiley
ity is ‘‘short.’’ The short party makes money on the fu- Investment Classics (John Wiley).
tures contract if the price of the commodity later falls. Kristof, N.: 1986, ‘Clerk Accused of Poisoning Drugs to
7 Make Money in Stock Market’, New York Times
(Pub. L. 85–839, § 1, Aug. 28, 1958, 72 Stat.
1013.) This is currently Title 7 Chapter 1, § 13–1 of May 31.
the United States Code. Lahart, J.: 2007, ‘Housing Bubble: Toil and Trouble
8 Follows Predictable Pattern’, Wall Street Journal
See Genesis, Chapter 25.
9 March 6.
Ferguson (2008, p. 345) gives an excellent sum-
mary of these cognitive biases. Nofsinger (2007) Mackay, C.: 1995, Extraordinary Popular Delusions & the
describes them in more detail. Madness of Crowds (Three Rivers Press, New York).
10 Malkiel, B.: 2008, A Random Walk Down Wall Street
Nelson (1969) provides a fascinating account of the
long struggle over usury and interest. (W. W. Norton & Company, New York).
Nelson, B.: 1969, The Idea of Usury: From Tribal Brother-
hood to Universal Otherhood (University of Chicago
Press, Chicago).
References Nider, J.: 1966, On the Contracts of Merchants (De Con-
tractibus Mercatorum), trans. Charles H. Reeves (Uni-
Aristotle: 1981, The Politics, trans. Thomas Alan Sinclair versity of Oklahoma Press).
(Penguin Classics, New York), p. 90. Nofsinger, J. R.: 2007, The Psychology of Investing, 3rd
Benedict XVI: 2008, ‘Angelus’, http://www.vatican.va/ Edition (Prentice Hall, Upper Saddle River).
holy_father/benedict_xvi/angelus/2008/documents/ Ryan, J. A.: 1902, ‘The Ethics of Speculation’, Interna-
hf_ben-xvi_ang_20080706_en.html. tional Journal of Ethics 12(3), 335–347.
Borna, S. and J. Lowry: 1987, ‘Gambling and Specula- Slater, T.: 1912, ‘Speculation’, in C. G. Herbermann et
tion’, Journal of Business Ethics 6(3), 219–225. al. (ed.), The Catholic Encyclopedia: An International
Chancellor, E.: 1999, Devil Take the Hindmost: A History Work of Reference on the Constitution, Doctrine, Discipline,
of Financial Speculation (Farrar, Strauss, and Giroux, and History of the Catholic Church, Vol. 14 (The En-
New York). cyclopedia Press, Inc., New York), pp. 212–213.
286 James J. Angel and Douglas M. McCabe

Time: 1956, ‘Odorous Onions’, Time July 2, http:// James J. Angel and Douglas M. McCabe
www.time.com/time/magazine/article/0,9171,891311, McDonough School of Business,
00.html. Georgetown University,
United States Congress: 1957, Onion Futures Trading: Washington, DC 20057, U.S.A.
Hearing, Eighty-fifth Congress, First [-second] Session, on E-mail: angelj@georgetown.edu;
S. 778 and S. 1514 (Committee on Agriculture and
mccabed@georgetown.edu
Forestry, U.S. Government Printing Office).