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Ownership Market or Speculation Market

June 9, 2011

While it isn’t investors that create wealth, they do have a role to play in an economy.  Investors negotiate the consumption production cycle and direct capital so that producers can meet consumption demand.  A society benefits most over the long run with an investment system that rewards long term and consistent creation of wealth.

 

One way of satisfying this is the banking system where banks collect savings and then loan the money in part to businesses based on an assessment of the ability to repay the loan.  Loan and savings rates would fluctuate if banking is a competitive market so that an equilibrium of investment happens consistent with the particular banking norms.  Modern economies also set up investment markets where parts of companies can be purchased because of promises of wealth creation.

 

The rules that govern these investment markets are essential to their good functioning.  With rules that encourage long term planning and prudent investing a consistent level of wealth creation can be generated.  On the other end speculation can be incentivized.  A speculator in an investment market looks to create wealth for him or herself by holding a security until it rises in price and selling it without regard to long term wealth creation potential.  A successful speculator can predict how a security will perform in the near future and act on those readings.

 

Speculation incentivizes the appearance of short term wealth creation without regard to long term performance.  A society in which investment or ownership markets have been replaced by speculation markets is marked by short term volatility in investment markets, speculative bubbles, and the sacrifice of long term wealth creation for the appearance of short term wealth creation.

 

Not only are producers less likely to make needed costly investments to drive long term success, the speculators serve no useful social function while speculating wealth for themselves.  These people are parasitical on a society while at the same time actively damaging to the long term well being of the population as a whole.

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From → Economics

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