Good Theories and Bad Practices. Speculation and the Economists of the 19th Century

Speculation in commodity and financial markets drew the attention of economists in the mid-19th century, when interconnected organized markets emerged, due in part to technical innovations. It is then that speculation became a profession, with specialized economic agents practicing it, meeting with hostility from the law and the general public. The paper reconstructs the arguments by which economists before World War I tried to show that speculation, hitherto condemned on a moral level and considered economically harmful, was instead useful to the smooth functioning of the economy. Their arguments rested on the belief that there exists a long-run fundamental price that reflects the ‘natural’ order of things. Toward this price market prices converge since they cannot depart from it except temporarily. However, faith in the market’s ability to bring out prices reflecting the fundamental values of commodities and financial assets was not without limits and contrary to what happened in the later period, many doubts remained with respect to some of the more speculative financial instruments.