Destabilizing Speculation on Organized Markets: Early Perspectives in the Spirit of Marshall

The idea that speculation exacerbates commodity and stock price volatility dates back at least from the second half of the nineteenth century when an extensive literature emerged to which Marshall contributed. The essence of his arguments, originally applied to commodities and subsequently extended to securities, was that speculation is mostly beneficial. Professional speculation improves resource allocation by reducing the size (if not frequency) of price fluctuations, enabling producers, manufacturers and traders to hedge against price risks and increasing the liquidity (and market value) of traded assets. These benefits more than offset the costs associated with occasional market manipulation and the problems raised by the presence of amateur speculators. According to Marshall, amateurs add noise to the market and tempt professionals away from their fundamental (and constructive) duties. As the number of amateurs increases, so does the incentive for professionals to devote their resources to anticipating short-run fluctuations in amateur opinion, which may have little if any connection with fundamentals. Based on these analytical considerations, Marshall endorsed the use of futures and short-selling by professionals while opposing options, which he saw as dangerous instruments in the service of ill-advised speculation.