Reference no: EM13779540

Please make correct sentences and good vocabulary and grammar..Teacher complain a lot about the way you make sentences and grammar and vocabulary.. 

your review, summarize the topic of the paper explaining the views of the authors on socially useful speculation and gambling, then provide your views on the topic. Your review should be at least one page not counting the title or reference pages.

The Ethics of Speculation James J. Angel Douglas M. McCabe ABSTRACT. Recently there has been an outpouring of consumer frustration over rising food and energy prices. Many politicians railed against ‘‘speculators’’ who allegedly drove up the prices of key necessities. Is speculation unethical? This article reviews the traditional arguments against speculation. Many of the standard criticisms confuse speculation with gambling. In much the same way as ethicists now draw distinctions between usury and normal business interest, we draw a distinction between socially useful speculation and gambling. Gambling involves taking on risk with no plausible expectation of making a profit. Gambling may provide entertainment value to 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 a profit will result. Speculators provide an important risk bearing service by taking on risks that others do not want. They help markets to function better by helping to incorporate information into prices as well as providing liquidity. Speculators may actually reduce shortages by causing quicker price increases that motivate producers to increase production and consumers to conserve. But even socially useful speculation may have an ethical dark side. Does such speculation cause damage by adding excess volatility to prices? Speculators may contribute to price bubbles. At what point does legitimate speculation become odious ‘‘price gouging?’’ We also draw an ethical distinction between speculation, which seeks to benefit from changing prices, and manipulation, actions taken to push prices away from their economically appropriate levels. KEY WORDS: Ethics, speculation, gambling, manipulation, price gouging Introduction The recent spikes in energy and food prices have sparked a chorus of outcries against speculation. In 2008, numerous bills were introduced in the U.S. Congress with the intent of reigning in ‘‘excessive speculation.’’1 Prime ministers and Presidential candidates railed against speculators. This contempt for speculators is not new. Aristotle (1981) referred to gains from speculative trading as ‘‘unnatural’’ and ‘‘justly censured.’’ He then went onto give an example of how a philosopher, Thales the Milesian, proved that he could make money. Thales expected a large olive harvest; so he gained control of all the olive presses in the region before harvest time. When the large harvest came in, pushing up demand for the presses, he rented them out at high prices. In 1468, Nider (1966) blasted speculators in De Contractibus Mercatorum, one of the earliest treatises on business ethics: However, it is clear that business dealers who neither transport nor conserve, nor by their industry improve things for sale, are blameworthy and stand properly removable from the commonwealth. Such people do not give an unequivocal assurance concerning the James J. Angel is an Associate Professor of Finance at Georgetown University’s McDonough School of Business. His research focuses on the operation of financial markets around the world. He has served as Chair of the Nasdaq Economic Advisory Board and has been a member of the OTCBB Advisory Board. He earned his undergraduate degree from the California Institute of Technology, his MBA from Harvard Business School, and his Ph.D. from the University of California at Berkeley. He is also a CFA charter holder. Douglas M. McCabe is a Professor of Management at Georgetown University’s McDonough School of Business, Washington, D.C. He serves on the Editorial Boards of 20 scholarly journals, including the Employee Responsibilities and Rights Journal and the Journal of Workplace Rights. He is the 2007 recipient of the Labor and Employment Relations Association’s Excellence in Education Award. He holds a Ph.D. from Cornell University and is a member of the Phi Beta Kappa. Journal of Business Ethics (2009) 90:277–286 Springer 2010 DOI 10.1007/s10551-010-0421-5 value of goods but merely buy in order to sell without performing the arduous duties mentioned above. Ryan (1902) found speculation to be ‘‘morally questionable’’: Every man who yields to the seductive temptation to speculate feeds the passion of avarice, strengthens the ignoble desire to profit by the losses of his fellows, cultivates a dislike for honest, productive labor, and exposes himself to financial ruin. Criticism of speculators comes from all sides of the political spectrum. Both Vladimir Lenin and Abraham Lincoln stated bluntly that speculators should be shot (Jacks, 2007). Despite these condemnations, speculation – and the criticism of it – has continued to the present day. This is not a black and white issue, as speculation is an important part of our modern business culture. In this article we examine various criticisms of speculation and draw an ethical distinction between speculation and other activities such as price manipulation, gambling, and price gouging. First, we need to define the term ‘‘speculation.’’ We define speculation according to the common usage. For example, Merriam-Webster (2008) de- fines the word speculate as to assume a business risk in hope of gain; especially: to buy or sell in expectation of profiting from market fluctuations. This is a slightly broader definition than Kaldor’s (1939) widely cited definition: … the purchase (or sale) of goods with a view to resale (re-purchase) at a later date, where the motive behind such action is the expectation of a change in the relevant prices relatively to the ruling price and not a gain accruing through their use, or any kind of transformation effected in them or their transfer between different markets. Note that both definitions include common examples of speculation, such as that of an investor who purchases gold today with the intent to sell it later at a higher price. In the first section, we discuss some of the common criticisms of speculation. Critics accuse speculators of distorting market prices through their activities, and thus harming those who depend on those commodities. Critics claim that speculators do not produce anything useful, and are thus parasites upon society. In the second section, we discuss some of the benefits of speculation. Speculators perform several very useful economic purposes. First, they provide risk bearing capacity, much like insurance companies. This makes it easier for producers and consumers to hedge their risks, and thus make producers willing to produce more. Second, they bring information to the market, potentially making prices more accurate. Third, their willingness to buy or sell purely on price brings liquidity to the market, making it easier for pure hedgers to hedge and reducing the transactions costs involved in hedging. Many of the criticisms of speculation stem from a confusion between speculation and other activities. In much the same way as it is now common to draw a distinction between normal interest and usury, we also draw ethical distinctions between speculation and other activities. In the third section, we draw a distinction between speculation and gambling. A speculator has a plausible expectation of making a profit, while a gambler does not. Speculation is often conflated with manipulation. The fourth section distinguishes between speculation and manipulation. Manipulators actively attempt to divert market prices away from their proper economic values, imposing severe losses on others. In the fifth section, we discuss the difference between speculation and price gouging. When normal market competition is absent, gougers may take advantage of desperate people in their time of need. In the sixth section, we attempt to draw a distinction between speculation and excessive speculation. Is it possible to have too much of a good thing? Without manipulation or other odious activities, is it possible to have too much speculation? It can when speculators engage in herd behavior and push prices to extremes that are not justified by economic fundamentals, even when there is no explicit conspiracy to manipulate. Furthermore, situations in which speculators do not assume the full risk of their speculation are also harmful. Our last section concludes. Speculation by itself is often a socially useful activity, but it is often confused with activities such as gambling, price manipulation, and price gouging. The potential for harm is one of the reasons that speculative markets 278 James J. Angel and Douglas M. McCabe such as futures markets are highly regulated, and regulators have an explicit mandate to target manipulation and excessive speculation. Criticisms of speculation This section contains a number of the standard criticisms of speculation. Speculators produce nothing Slater (1912) criticizes speculators: Hence, producers and consumers are robbed by clever men, who manipulate the markets in their own interest, produce nothing, perform no useful social service, and are parasites on commerce. This criticism is pretty straightforward: Speculators 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 and consumers implies that consumers pay more and producers get less than they should. This is essentially a tax that imposes a deadweight cost on society. Since the farmers are paid less, they will produce less. This argument is fundamentally flawed in that speculators do provide a useful service, that of risk bearing, just like insurance companies. They make it possible for other market participants to get rid of, or hedge, risk that they do not want to bear. We show in the next section that the ability to hedge risk may motivate some producers to produce who otherwise might not be willing to because of the risk. Speculators drive the prices of vital commodities above their true value and thus hurt the poor Pope Benedict XVI (2008) criticized the ill effects of speculation when he discussed ‘‘…the needs of the weakest and poorest people whose vulnerability today has increased because of financial speculation and instability and their pernicious effect on the price of foodstuffs and energy.’’ Clearly, any trading in a commodity affects its price, and if speculators in the aggregate are net purchasers of a commodity then its price will go up. There is no doubt that higher prices for vital commodities have a disproportionate impact on the poor. During a period of shortage, markets use prices to ration scarce resources. In this way, scarce resources are allocated to those willing to pay the most for them. This avoids the inefficiencies associated with other rationing schemes, such as long waiting lines, or corruption. Although using price to ration scarce goods maximizes economic efficiency, the poor are the ones who suffer the most when high prices are used to ration scarce necessities. However, it is by no means proven that speculators drive prices above their true value. While market prices sometimes (with the benefit of 20–20 hindsight) overshoot fundamental values, this can occur even in the absence of price-driven speculators. Indeed, because speculators have a strong incentive to buy when the price is low and sell when it is high, they should have a stabilizing influence on the markets. Speculators drive down the prices of commodities below their true values and thus hurt producers Just as speculators can make money by betting that prices go up and being right (or lucky), they can also make money by betting that prices go down and being right (or lucky). If speculators in the aggregate are pessimistic, then their sales will depress prices. When prices are falling, speculators are a natural target for criticism. However, the same rebuttal applies as when speculators are accused of inflating prices. It is by no means proven that speculators are the cause of a particular price drop. Because speculators have a financial incentive to move prices in the direction of their fundamental value, they should be a stabilizing force on prices. Speculation is just gambling Both speculation and gambling involve the intentional assumption of risk and are often confused. Gambling has been condemned for centuries as an addictive behavior that distracts participants away from other productive activities. By allowing gamblers to bet on vital commodities, one runs the risk The Ethics of Speculation 279 that their gambling activity will affect prices in pernicious ways that are unjustified by economic fundamentals. As we discuss in a later section, speculation is very different from gambling because the speculator at least has some plausible reason for making money. Speculators add volatility to the market Market prices are often naturally volatile. Prices can and do respond quickly to news regarding supply and demand in a market. Weather shocks, work stoppages, political events and more can quickly move prices. Speculators are sometimes criticized for contributing to market volatility. Their willingness and ability to trade quickly based on hunches and rumors may have a destabilizing impact on prices. On the other hand, if prices move away from their fundamental values, speculators have a strong financial incentive to move prices back towards those levels. And yet some speculative strategies may also exacerbate volatility. Suppose speculators buy a commodity, hoping to sell later at a higher price. If in the aggregate they wait until it is clear that the peak of prices has passed and the commodity is in a downward trend, they will be selling into the downward trend and accelerate the fall in price. Whether speculation in the aggregate affects volatility is an empirical question. Jacks (2007) examined cases in which certain futures markets in the U.S. and Germany were banned, and found that the bans actually increased volatility. Speculators contribute to speculative bubbles Markets – like any human institution – sometimes make mistakes. There is a long history of speculative bubbles in financial as well as nonfinancial markets in which prices reached absurd levels that, in retrospect, were not justified by economic fundamentals. 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 with the internet and housing bubbles. The collapse of such bubbles is often accompanied by widespread economic pain.2 Speculators are often blamed for exacerbating these bubbles. Because speculators often bet on future price movements without ever actually owning the actual commodity, they can add fuel to the fire. There are many anecdotes from the recent 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, 2007). When their bets went sour, they just walked away from the loans on their properties. Indeed some speculators clearly contributed to these bubbles. However, that does not mean that speculation by itself creates bubbles. Once again, speculators have an incentive to speculate against bubbles. Benefits of speculation Speculators provide risk bearing capacity to the economy Although sometimes speculators trade with other speculators who have different opinions, often they trade with producers or consumers of a product who are trying to hedge their risk. The classic example is that of the wheat farmers who suffer considerable risk when they plant their crops. Prices at harvest time could be almost anywhere. In order to reduce their risk, they can lock in the price they will get at harvest time by agreeing in advance to sell the crop at a fixed price to a speculator. The farmers thus know exactly how much they will receive for their crop and can attend to the business of farming without worrying about price fluctuations that occur long after they have planted the crop in the ground. In the way, speculators act like insurance companies providing a risk reduction product to the farmers: They guarantee that the farmers will receive a specific price for their crops. The speculators presumably have the capacity to absorb the risk, and thus the risk is transferred from the farmers who do not have much desire to carry this risk to other parties that can bear the risk. Speculators make more production possible Indeed, the risk bearing that speculators bring to the market may actually increase the output of society. 280 James J. Angel and Douglas M. McCabe Consider the case of an oil producer with an old declining oil field. At current prices, it would be economically feasible to invest in expensive tertiary recovery methods to get more oil out of the ground. However, oil prices are notoriously volatile and can 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 sell the oil in advance to a speculator at a fixed price, the producer can get rid of the price risk and lock in enough of a profit to make the investment worthwhile. In this way, speculators really do produce something because their risk bearing motivates others to produce more. Furthermore, the impact of speculators on price 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. When farmers see higher prices for grain, they naturally produce more. Speculators bring information to markets and make prices more informative Another extremely valuable service provided by speculators is that of making a market system more efficient. When speculators trade, they reveal some of their information to the market, which affects the price. Indeed, they have a very strong financial incentive to make sure that they have – and trade upon – good information about the price. Their information is thus incorporated in prices, ensuring that market prices reflect all of the information available. Prices send the signals to consumers about how much to consume. When the price goes up, they consume less, and when price goes down, they consume more. Prices also send signals to producers about how much to produce. Likewise, an increase in price sends a signal to produce more and a decrease to produce less. By making sure that prices contain good information about supply and demand, speculators help to make markets more efficient. Speculators can stabilize prices Speculators have a strong incentive to buy when prices are low and sell when prices are high. This makes them a natural stabilizing force in the markets. Friedman (1953) argued that speculators who trade in stabilizing ways make money, and those who don’t – lose money. Thus, speculation should have an overall stabilizing effect. Speculators make it cheaper for producers and consumers to hedge The existence of speculators in a market makes it easier for producers and consumers who want to hedge to find someone to trade with. Competition from speculators for their trades also reduces their transaction costs and helps them to get better prices. Speculation and gambling We draw a very important ethical distinction between speculation and gambling. A speculator has some plausible reason – at least plausible to the speculator – as to why the speculator will make money as a result of the risk undertaken. A gambler does not. A gambler takes on risk for the entertainment value, while presumably knowing that on average the gambler will lose. Our position is very different from that of Borna and Lowry (1987) who assume that ‘‘‘speculative business’ practices and gambling are similar in ‘nature’.’’ While they may be similar in terms of risk, they are certainly not similar in terms of intent. A speculator rationally intends to make money. A gambler may want to make money, but they cannot rationally expect to do so in most gambling environments. There are a few exceptions where players with exceptional skill can make money, such as professional poker players or blackjack card counters. However, the laws of probability dictate that on average players of roulette and slot machines will lose. Society’s views on gambling have evolved between utter prohibition and a grudging regulated acceptance (Clotfelter, 1989). The argument against gambling is pretty straightforward. Gamblers spend time and resources that otherwise could be spent in other activities. Compulsive gamblers are addicted to gambling and sometimes cause great misery to themselves and their families. Occasionally they resort to crime to indulge their addiction. Casinos The Ethics of Speculation 281 also encourage their patrons to engage in other risky activity such as drinking in order to get them to gamble more. The ‘‘get rich quick’’ allure of gambling distracts individuals from more productive value creating opportunities. For example, an intelligent person may choose to be a professional poker player rather than start a productive enterprise. However, many of the legal prohibitions against gambling disappeared in the late twentieth century. Many states instituted lotteries and legalized casino gambling. The argument for legalized and regulated gambling is that it is an entertainment activity similar to going to the movies. Yes, some people abuse it, just as some people abuse alcohol or drive too quickly, yet that is not sufficient justification for depriving everyone of a pleasant recreation opportunity.3 Furthermore, governments obtain substantial tax revenue from legalized gambling, although some would debate whether the additional revenue fully offsets the social costs imposed by increased gambling. In addition, gambling led to the development of many of the mathematics tools of statistics and probability, which are extremely useful in many fields. Gambling examples are commonly used to teach probability even today. Some speculators are also gamblers. Indeed, financial markets can be used to gamble as well as to speculate. This is one of the many reasons that financial markets are highly regulated. For example, FINRA suitability rules require brokers to only recommend ‘‘suitable’’ investments to their clients.4 However, the fact that a product can be misused does not make other legitimate uses unethical. For example, the fact that a knife can be used to kill someone does not make it wrong to use a knife to slice a loaf of bread. The issue here is whether the entry of gamblers who are trading for pleasure instead of profit destroys the social utility of a financial market. This brings us to the concept of ‘‘excessive speculation’’ which we will address later. Speculation and price manipulation Speculators are often accused of manipulating prices. Here we define manipulation as taking actions designed to move prices away from prices justified by economic fundamentals and to profit from the disruption. A classic example of manipulation occurred on the Chicago Mercantile Exchange.5 The perpetrators controlled 98% of the onion crop that could be delivered against the onion futures contract. They then took an even larger short position in onions, such that they would make money if the price of onions fell.6 They then shipped their onions out of Chicago, repackaged them, and shipped them back into Chicago to make it look like large quantities of onions were arriving in the city. The prices of onions plummeted as a result. In another scandal, manipulators managed to get control of all of the freight cars that could bring onions into the city, thus causing a temporary shortage that caused prices to skyrocket and then collapse. Such manipulations cause great harm to many people. Innocent farmers are hurt by the collapse of the price for their crops. The actions needed for the subterfuges were a wasteful and unnecessary use of transportation and labor resources. Legitimate market makers also lost heavily as a result. Manipulations damage the reputation of markets, with harmful impacts on the economy. The markets become less useful for those who actually wanted to hedge their risks to engage in legitimate speculation. Indeed, the public outrage over scandals in onion futures was so great that in 1958 the United States banned trading in onion futures, a ban which extends to this very day.7 Economic studies of the onion futures ban generally find that the volatility in onion futures actually increased after the ban, providing further evidence that permitting speculation in futures markets actually decreases volatility (Jacks, 2007). The damage from manipulation can be more than economic. In 1986, rat poison was placed in Contac cold capsules in an attempt to bring down the stock price of SmithKline Beckman, the manufacturer of Contac (Kristof, 1986). The perpetrator was caught and later convicted because his options trading just before the poisoning aroused the suspicions of other traders. Clearly, manipulation is an unethical practice. However, most speculative transactions are not manipulative. The ability to speculate does, however, create an incentive for manipulation. By manipulating, a speculator can help to achieve the desired profit. However, this temptation does not in and of itself make speculation unethical. There are many useful tools that also create temptation for wrongdoing. As with gambling, the existence of the 282 James J. Angel and Douglas M. McCabe threat of manipulation is another of the reasons for the careful regulation of financial markets. Speculation and price gouging From time to time there are reports of sellers charging prices far beyond the standard market price for the commodity. When there are natural disasters, many are outraged when food, water, and fuel are sold at astronomical prices. One of the earliest examples of price gouging occurs in the book of Genesis, in which Jacob takes advantage of Esau’s famished condition and buys Esau’s birthright in exchange for a bowl of soup.8 Curiously, Jacob is not punished for this but actually gets away with it. Although many would criticize such price gouging as taking unfair advantage of people’s distress, others point out that the ability to gouge creates incentives for entrepreneurs to get the scarce commodity to the place where it is most valuable. However, the standard free market argument generally assumes that markets are working with natural competitive forces at play. In times of disaster, this assumption is often void. A gouger has a local monopoly on the scarce commodity and exploits this monopoly. Gougers violate social norms that dictate that one should help out in times of disaster, not seek to profit from them. Although speculators may sometimes gouge, speculation is not the same as price gouging. Indeed, not all price gougers are speculators. Someone who just happens to have some extra flashlight batteries may choose to sell them at a very high price during a power failure. Indeed, a speculator, seeing that prices for future delivery have overshot their true value during a shortage, may actually contract to sell the commodity for future delivery, thus bringing the price closer to its fundamental value. Thus, during the recent spike in oil prices, speculators who shorted oil futures during this time helped to alleviate the price pressure. Speculation versus ‘‘excessive’’ speculation Given the beneficial aspects of speculation, is it possible to have too much of a good thing? How can we possibly have too much risk bearing capacity or too much insurance? How can we not want every bit of information to be reflected in price? Is there anything wrong with keeping transactions costs for legitimate hedgers down? Much of the recent outcry and (proposed legislation) has been over ‘‘excessive speculation.’’ Alas, ‘‘excessive speculation’’ is hard to define. Indeed, the laws proposed in 2008 seeking to reign in excessive speculation did not even attempt to define it, just put limits on trading other than ‘‘legitimate’’ hedging. It appears that the critics are seeking to prevent speculation that creates harmful outcomes, such as prices that deviate from a perceived appropriate value or prices that fluctuate excessively. No human institution is perfect. Just as an individual can make mistakes, so can groups of individuals. In particular, from time to time bubbles arise in markets. Bubbles tend to occur for a number of reasons through various cognitive biases in investors.9 Often there are favorable economic conditions and a plausible story, such as a great new technological innovation. Generally rising prices lead to an expectation of even more rising prices, which is known as adaptive expectations: people naturally expect trends to continue. Furthermore, the natural instinct of humans is to go along with the crowd. Speculators tend to confuse their own good luck with skill, and become overconfident in their investing skills. Overconfidence, adaptive expectations, and herding combine to form a bubble. Eventually the market becomes overheated and overshoots values appropriate with economic fundamentals, and the bubble eventually bursts. Alas, it is hard to criticize many bubble participants on ethical grounds, as they often have plausible reasons for their actions, which could even be beneficial to society. For example, in the recent oil bubble, an investor who believed that we have mined most of the easy-to-extract oil on the planet and that global demand would continue to increase, may have legitimately believed that the value to 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 strong price signal to consumers to use less oil and to entrepreneurs to produce more alternative energy. It is only later with the benefit of 20–20 hindsight that the crowd comes to its senses and realizes the gross inaccuracy of its collective forecast. The Ethics of Speculation 283 Can ‘‘excessive’’ or ‘‘harmful’’ speculation only be determined in hindsight? Perhaps. But some forms of speculation are clearly harmful to others. In particular, it is harmful when a speculator manages to transfer the risk of loss onto unsuspecting parties without their consent. Consider, for example, the case of a house flipper who buys a home with no money down. If the house goes up, the flipper retains all the profit. If the house goes down, the flipper walks away from the house, sticking the loss 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 ultimate lenders did not fully comprehend the risk in their lending activities. The failure of these lenders also imposed damages on numerous others in the economy. Such a risk transfer can occur in almost any highly leveraged situation, whether the speculator is an individual or a hedge fund. The failure of highly leveraged institutions can also cause other institutions to fail, igniting a chain reaction of failure through the economy. Thus, one way to define a form of excessive speculation is speculation in which speculators have managed to transfer risk to other unwitting participants through the use of borrowed money. Compulsive gambling disguised as speculation is also a form of excessive speculation. Trading by compulsive gamblers can be particularly injurious to markets because gamblers may be trading based on their compulsion, not their information. Their trades may distort prices away from their fundamental economic values and send false price signals to producers and consumers. Gamblers who have lost money may be tempted to ‘‘double down’’ and increase their bets in attempts to win back their losses. This increases their losses, with potentially devastating consequences to themselves, their employers, and the community around them. What, if anything, should be done about the natural tendency of humans to engage in speculative bubbles is a matter of debate best left to other venues. Exactly how and when the government should call out the market riot police to attempt to quell an irrationally exuberant bubble is a tricky question. The evidence from past bubbles indicates that markets are not always perfect, and severe economic damage can follow the collapse of a bubble. Likewise, the failure of both centrally planned economic systems along with numerous government price control programs in market economies during the twentieth century also indicates that governments generally have a poor track record when they try to manage prices. Yet reasonable limits on the amount of leverage used in speculation can contain the damage from bets gone bad. Summary and conclusion Speculation is the act of taking on a business risk in the hope of making a profit. Speculation and speculators have been criticized for centuries. They have been called parasites because they produce nothing and profit from the labors of others. They have been accused of distorting prices and thus harming both producers and consumers. Speculation is often confused with gambling, but it is distinct. Gambling is taking on risk without an expectation of a commensurate profit, while speculators have a plausible expectation that they will profit. Speculation also has many beneficial economic benefits. Speculators provide important risk bearing capacity that takes away risks from producers and consumers, and can thus encourage production. Speculation is similar to many other human behaviors. Although it has many beneficial aspects, it also has an ethical dark side. Some speculators do engage in unethical activities such as price manipulation. When pathological gamblers use markets for their gambling urge, they may distort prices far beyond their true level. As with other human activities it is possible to take a good thing too excess. For example, speculators may exacerbate bubbles in markets. In many ways our distinction is similar to that often made between the charging of business interest and excessive interest, which is usury.10 Business interest has many legitimate uses that further economic growth, while predatory lending is unethical. Legitimate speculation helps the economy to grow, while excessive speculation can exacerbate harmful price bubbles. 284 James J. Angel and Douglas M. McCabe Notes 1 To be precise, a search of thomas.loc.gov indicates over 25 bills were introduced in the 110th Congress with language referring to ‘‘excessive speculation.’’ Bill titles include ‘‘End Oil Speculation Act of 2008,’’ ‘‘Stop Excessive Energy Speculation Act of 2008,’’ ‘‘Over-theCounter Speculation Act,’’ and ‘‘Prevent Excessive Speculation Act.’’ 2 See Mackay (1995), Chancellor (1999), Kindleberger and Aliber (2005), and Malkiel (2008) for descriptions of some of the more famous bubbles. 3 Many of the issues here are similar to those involved in other risky activities. See Coyne and Traflet (2008). 4 FINRA (2008) Rule 2310. FINRA is the Financial Industry Regulatory Authority, the self-regulatory organization that polices brokers in the United States. 5 See Time (1956) and U.S. Congress (1957) for more juicy details. For details on this and other scandals, see Geisst (2002). 6 In a futures contract, the party that agrees to buy the commodity for delivery at some point in the future is ‘‘long’’ and the party that agrees to sell the commodity is ‘‘short.’’ The short party makes money on the futures contract if the price of the commodity later falls. 7 (Pub. L. 85–839, § 1, Aug. 28, 1958, 72 Stat. 1013.) This is currently Title 7 Chapter 1, § 13–1 of the United States Code. 8 See Genesis, Chapter 25. 9 Ferguson (2008, p. 345) gives an excellent summary of these cognitive biases. Nofsinger (2007) describes them in more detail. 10 Nelson (1969) provides a fascinating account of the long struggle over usury and interest. References Aristotle: 1981, The Politics, trans. Thomas Alan Sinclair (Penguin Classics, New York), p. 90. Benedict XVI: 2008, ‘Angelus’, https://www.vatican.va/ holy_father/benedict_xvi/angelus/2008/documents/ hf_ben-xvi_ang_20080706_en.html. Borna, S. and J. Lowry: 1987, ‘Gambling and Speculation’, Journal of Business Ethics 6(3), 219–225. Chancellor, E.: 1999, Devil Take the Hindmost: A History of Financial Speculation (Farrar, Strauss, and Giroux, New York). Clotfelter, C. T.: 1989, Selling Hope: State Lotteries in America (Harvard University Press, Cambridge). Coyne, M. P. and J. M. Traflet: 2008, ‘Ethical Issues Related to the Mass Marketing of Securities’, Journal of Business Ethics 78(1–2), 193–198. doi:10.1007/s10551- 006-9319-7. Ferguson, N.: 2008, The Ascent of Money: A Financial History of the World (Penguin Press, New York). FINRA: 2008, FINRA Manual, Rule 2310, https:// finra.complinet.com/en/display/display_main.html?rbid =2403&element_id=3638. Accessed 12 Jan 2008. Friedman, M.: 1953, ‘The Case for Flexible Exchange Rates’, in M. Friedman (ed.), Essays in Positive Economics (University of Chicago Press, Chicago). Geisst, C. R.: 2002, Wheels of Fortune: The History of Speculation from Scandal to Respectability (John Wiley and Sons, Hoboken). Jacks, D. S.: 2007, ‘Populists Versus Theorists: Futures Markets and the Volatility of Prices’, Explorations in Economic History 44, 342–362. Kaldor, N.: 1939, ‘Speculation and Economic Stability’, The Review of Economic Studies 7(1), 1–27. Kindleberger, C. P and R. Aliber: 2005, Panics, Mania, and Crashes: A History of Financial Crises, Wiley Investment Classics (John Wiley). Kristof, N.: 1986, ‘Clerk Accused of Poisoning Drugs to Make Money in Stock Market’, New York Times May 31. Lahart, J.: 2007, ‘Housing Bubble: Toil and Trouble Follows Predictable Pattern’, Wall Street Journal March 6. Mackay, C.: 1995, Extraordinary Popular Delusions & the Madness of Crowds (Three Rivers Press, New York). Malkiel, B.: 2008, A Random Walk Down Wall Street (W. W. Norton & Company, New York). Nelson, B.: 1969, The Idea of Usury: From Tribal Brotherhood to Universal Otherhood (University of Chicago Press, Chicago). Nider, J.: 1966, On the Contracts of Merchants (De Contractibus Mercatorum), trans. Charles H. Reeves (University of Oklahoma Press). Nofsinger, J. R.: 2007, The Psychology of Investing, 3rd Edition (Prentice Hall, Upper Saddle River). Ryan, J. A.: 1902, ‘The Ethics of Speculation’, International Journal of Ethics 12(3), 335–347. Slater, T.: 1912, ‘Speculation’, in C. G. Herbermann et al. (ed.), The Catholic Encyclopedia: An International Work of Reference on the Constitution, Doctrine, Discipline, and History of the Catholic Church, Vol. 14 (The Encyclopedia Press, Inc., New York), pp. 212–213. The Ethics of Speculation 285 Time: 1956, ‘Odorous Onions’, Time July 2, https:// www.time.com/time/magazine/article/0,9171,891311, 00.html. United States Congress: 1957, Onion Futures Trading: Hearing, Eighty-fifth Congress, First [-second] Session, on S. 778 and S. 1514 (Committee on Agriculture and Forestry, U.S. Government Printing Office). James J. Angel and Douglas M. McCabe McDonough School of Business, Georgetown University, Washington, DC 20057, U.S.A. E-mail: [email protected]; [email protected] 286 James J. Angel and Douglas M. McCabe Copyright of Journal of Business Ethics is the property of Springer Science & Business Media B.V. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.