Baruch notes and comments on the growing animus toward speculators. He’s absolutely correct in noting that an “all indexing” world couldn’t function because indexing is a free rider strategy whose ultimate engine is speculation. He’s also correct in noting that our current system is the result of evolution, not design. It works the way it does because alternatives didn’t work as well. I just wish he had said more about the value of speculation.

We enjoy many modern miracles, ranging from modern medical technology to computers to cell phones to great frozen pizza. These wonders didn’t just materialize out of thin air. All material progress has happened because someone had a great idea and teamed with someone with sufficient funds to nurture and expand the idea. Someone put their money at risk to grow the businesses that produce the miracles. This happens in the early stages of a company’s life It also happens for mature companies. If you speculate and buy a share of General Electric, you’re betting that GE will do some things of sufficient benefit to society that you will be rewarded. If you sell a share of GE, you’re betting that there are better uses for the money. Speculators drive capital into new places. Good speculators are profitable. Bad speculators don’t last long. Society benefits from speculation.

The animus toward speculation is a classic case of “shoot the messenger”. Prudent speculators risk their own money identifying the most appropriate beneficiaries of capital. But their conclusions often disagree with those of pundits and our political elite. Prudent speculators operate on the basis of reality; pundits and politicians operate on the basis of what sounds nice if you don’t think about it too much. We need speculators more than we need the political elites!


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