If there is an abundance of steel in one place, say Pennsylvania, and a great demand for steel in another place, say New York, would there be any economic value in the act of transporting steel from Pennsylvania to New York?
Of course—and quite obviously. The act of transporting resources across space is a valuable activity, and no one is surprised by the fact that a good many people earn money doing it.
But if moving resources across space is valuable, what about moving resources across time? Aren’t space and time part of the same continuum after all?
For some reason, moving resources from one point in time to another point in time is more controversial. Many people think it’s an activity that creates no value and deserves no compensation. They are wrong.
Transporting resources through time is more commonly known as speculation, a term that makes some people cringe. I was reminded of this a few weeks ago when I came across the following quotation posted on Facebook:
Take now . . . some hard-headed business man, who has no theories, but knows how to make money. Say to him: “Here is a little village; in ten years it will be a great city—in ten years the railroad will have taken the place of the stage coach, the electric light of the candle; it will abound with all the machinery and improvements that so enormously multiply the effective power of labor. Will in ten years, interest be any higher?” He will tell you, “No!” “Will the wages of the common labor be any higher . . .?” He will tell you, “No the wages of common labor will not be any higher. . . .” “What, then, will be higher?” “Rent, the value of land. Go, get yourself a piece of ground, and hold possession.” And if, under such circumstances, you take his advice, you need do nothing more. You may sit down and smoke your pipe; you may lie around like the lazzaroni of Naples or the leperos of Mexico; you may go up in a balloon or down a hole in the ground; and without doing one stroke of work, without adding one iota of wealth to the community, in ten years you will be rich! In the new city you may have a luxurious mansion, but among its public buildings will be an almshouse.—Henry George, Progress and Poverty, 1879
Henry George was an influential nineteenth-century intellectual, but he is by no means the only person who has advanced the idea that speculating on land or other goods is undeserving of profit. There are two main errors at play in this analysis of speculation. The first is the labor theory of value, and the second is ignorance of the element of time in the market process.
Labor and Value
Economists from Adam Smith to Karl Marx had a hard time understanding the relationship between the cost of production and the price of goods on the market. In its crudest form, the labor theory of value asserts that the cost of production, especially labor, simply determines exchange-value, or price. Neither Smith nor Marx saw such a direct and simplistic relationship between cost and price, but both failed to explain prices and costs in terms of subjective marginal utility. The simplistic interpretation of Smith’s and Marx’s struggles to explain price has affected the common understanding, and a great many people believe that there’s something wrong with high prices on goods that require little labor.
Although the subjectivity of economic value is basic to economics, it has still struggled to penetrate the public consciousness fully. Most people believe it when they act as consumers; few people are willing to pay prices based on labor cost. Yet many people abandon subjectivity when acting as would-be policymakers or critiquing the activities of others. They are open to talk about “fair prices” and “fair wages.” You also hear criticisms similar to George’s about the injustice of people making money despite not laboring hard.
This is nonsense. First, there is no such thing as a “correct” price (or wage, rent, interest rate, profit, loss, or any other name by which prices may go). Price simply reflects the various subjective values that consumers and producers place on competing items. Second, speculation is a form of labor and often a very valuable one. This is because speculation is actually time travel.
George describes an individual buying land and sitting on it for ten years. He then says the man did not “one stroke of work.” But which is it? Buying land and preserving it for ten years is doing something. It is moving that resource through time—from a point when its services bring a lower return to a point when they bring a higher return. (The profit is generated by the difference.) It may not be physically challenging, but it is an activity, and if profit is earned in a genuinely free market, that is proof that it is a valuable activity.
It is fair to point out that speculation in land is slightly different from speculation in other goods. Other goods can be consumed, so buying and holding them literally prevents them from disappearing. The value of speculation in such goods should be clear: Buying and holding goods in anticipation of future shortages or price increases serves to smooth out supply and price swings over time and promotes stability. Land of course is not consumed in that sense, but buying and holding land is still a form of resource preservation, as the land is protected from other uses and is made available for sale at a later date for uses that may not have been possible had it not been purchased by the speculator.
Consider a slightly modified version of the question posed at the beginning of this article: If there is an abundance of land at one time, say New York City circa 1800, and a great demand for land at another time, say New York City circa 2012, would there be any economic value in the act of cramming the land into a time machine and moving it from 1800 to 2012?
There is no reason to expect a different answer to this question than to the original question about moving resources through space. When seen in this light, it is clear that speculation is productive economic activity.
This does not mean that all resource time travel is valuable, just as not all resource transportation through space is valuable. There are no guarantees in markets because consumers’ subjective preferences can change as often and as dramatically as the weather. But it would be foolish to try to prevent such unexpected changes or to prohibit the guessing game of moving resources through time and space to curb losses. Incorrect guesses about the value of resources at different points in space and time create value as well. They generate new price signals that help entrepreneurs better choose how to allocate other resources.
Critics of speculation rarely talk about the losses suffered by speculators (unless the losses are suffered by certain groups of people the critics happen to like—themselves, homeowners, or others). Henry George is unhappy about the man who got rich sitting on land for ten years. But what about the man who lost everything doing the same in a different town? Profit and loss result from speculation, and while loss is never desirable, again, both provide valuable market signals that help make the market more efficient. There is no better alternative for allocating resources through time and space than free markets. Ludwig von Mises, F. A. Hayek, and many other economists proved this logically during the socialist calculation debate, and socialism and other forms of economic centralization have proven it in practice time and again.
The market is a dynamic process, and when economic actors move resources through space or time, they have the potential to create tremendous value. Their actions always generate important price signals.
At a time when governments are aggressively borrowing from projected future resources to pay for the past and present, we should be especially grateful for the efforts of those who are busy transporting resources from the present to the future. If there’s anything left when we get there, we’ll have the time machine of speculation to thank.