Market-hampering Land Speculation: Fiscal and Monetary Origins and Remedies

I The Nature and Effects of Asset Speculation In the most basic sense, speculation IS a method of dealing with the uncertain future. Faced with uncertainties, people need to adjust their actions to accomplish their ends relative to the expected actions of others and of the physical world. This requires every person to speculate and understand the future, to think and conjecture about various probabilities and options. J.R. Hicks (1939, p. 56) remarked that "The demand for money itself is necessarily and always speculative in a wide sense" because it involves expectations. Ludwig yon Mises (1966, p. 113) went deeper, recognizing that "Every action is speculation." Information about the future differs from conjectures about the future, the latter being "noise," which can be confused with information. Fischer Black (1986, p. 529) defines noise as "the arbitrary element in expectations." Noise is "information that hasn't arrived yet." "Noise makes financial markets possible, but also makes them imperfect." If information about the future is completely lacking, there is only noise, and the rational expectation of a future variable is the present value. Typically, there is some information, but it is incomplete, and it is not easy to differentiate some of it from noise, so people engage in differing financial speculations. In the financial sense, speculation is the utilization of one's opinion of the future in order to make a profit. More specifically, asset speculation consists of the purchase or short sale of an asset with the aim of profiting from a favorable movement in the price due to changes in demand by others or due to supply shifts. John Maynard Keynes (1936, p. 156) compared asset speculation to a beauty contest, in which the speculator does not pick who he or she feels is the prettiest, or even who the public views as the prettiest, but rather the person who fits "what average opinion expects the average opinion to be." Financial speculation differs both from gambling and from investment. A gambler gives up a fixed amount of money in the hope of obtaining a greater amount, based on some probability of gain. Economic investment is an increase in capital goods or an increase in human capital. A financial investment consists either of funds spent for economic investments - either directly or indirectly (by loaning funds to investors) - or of loans to consumers and to government as an investor or consumer. The payoff from economic investment is the increase in the productivity of an enterprise due to enhanced capital goods. Overall, market-based economic investments tend to be positive sum because an increase in capital goods and human capital normally increases productivity. Gambling is a zero-sum game, after the overhead taken by the sponsor, because the gain from one party is due to the loss of another. The money gains from asset speculation is typically zero sum, financial instruments having an equal number of sellers and buyers, but the speculation has nonzero externalities. A speculator buying an asset often expects demand to increase because on net, some pessimists or neutral players become optimists, possibly from changes in the financial environment, which the speculator places greater weight on than the median speculator. In other cases, the speculator is betting that an enterprise or commodity will have favorable luck on the supply side. A firm might strike oil or find a large vein of gold, or the price of an agricultural commodity might rise due to weather conditions, or there might be a favorable change in legislation and government expenditure, making a venture more profitable because of lower costs or a subsidy. Speculators also speculate on changes in mass psychology, as noted by Keynes (1936, p. 155). Among the financial instruments held by speculators are actual commodities (such as metals, currency), real estate, stocks and bonds, indexes on a range of stocks and other financial instruments, forward and futures contracts on commodities, derivatives related to interest rates, and options to buy (calls) or to sell (puts) stocks, commodities, and indexes during some time interval at a certain price. …