Speculation: Origin and Diffusion of a Controversial Concept

In this paper, I present my research about the historical evolution of the concept of speculation from its uncertain seventeenth century origins (the word speculation, as an economic term, appears for the first time in a Spanish text: a Por- tuguese Sephardic Jew from Amsterdam, Joseph Penso de La Vega) up to the Wall Street Crash of 1929. Although in public opinion the term only has a negative mean- ing, associated with economic disorder or irrational euphoria, in economic theory the concept of speculation still has an ambiguous and vague meaning: on the one hand, in the mainstream view, speculative activity is considered beneficial because it facilitates price levelling across distance, reduces price fluctuations over time, pro- vides risk bearing capacity like insurance, brings liquidity to the market reducing the transaction costs, brings information making a market more efficient and directs ef- ficient allocation of savings by signalling the most profitable investments; on the other, according to minority view, speculation is a gambling and a sterile transfer of money, associated to abnormal price movements not related to real economic phe- nomena in the sphere of production and consumption, caused by spontaneous or manipulated waves of euphoria or panic. The convergence of opinion between Say, McCulloch and Mill gave nineteenth century economic literature a confused view of speculation, identified with commercial activity in general, paving the way for defensive visions which emphasize the role of speculative activity in promoting the efficiency of markets, enhancing its stabilizing function as a special application of the general theory of the free market. Despite attempts to reconcile the speculative phenomenon with the general principles of self-regulated market, identifying speculation with the arbitrage mechanism, the problem of speculation as a cause of market instability cannot be entirely ignored. Thus, in the dominant economic lit- erature, good and useful speculative activity is contrasted to an irrational specu- lative spirit that. at certain times, causes trade crises, waves of panic and consequent picturesque financial scandals. However, this kind of speculation can be easily con- trolled and reshaped through appropriate policies. The theory of speculation as a systematic destabilizing factor remains confined to the heterodox field or to the mainstream critical view.