Just read these excepts produced by Brad DeLong.  Mill is debating whether gold-convertibility is enough to prevent damaging speculation.  His insights into how speculation takes place are extremely advanced – no ‘rational economic man’ here:

Speculation is almost always set in motion by something which affords apparent grounds for expecting either an extra demand or a deficient supply. But the anticipation may, in the first place, be erroneous; in the second, however rational it may be, the speculation (especially where the prospect of gain is considerable) is very likely to be overdone, each speculator conducting his operations as if he alone knew the circumstances on which the hope of profit is grounded. The rise consequent upon the speculative purchases attracts new speculators, insomuch that, paradoxical as it may appear, the largest purchases are often made at the highest price. But at last it is discovered that the rise has gone beyond the permanent cause for it, and purchases cease, or the holders think it is time to realise their gains. Then the recoil comes; and the price falls to a lower point than that from which it had risen, because the high price has both checked the demand, and, by stimulating production or importation, called forth a larger supply.

Brad clearly intends this to show that a stable value of the currency -whether through inflation targetting or gold-convertibility – is no guarantor of asset-stability, or macro-economic stability.  And life under the gold standard WAS volatile.


3 thoughts on “JS Mill was there first

  1. And obviously in contrast to the Friedman view that speculators reduce volatility by buying low and selling high. I believe – I’m sure you know more – that the main defence of that is that if it wasn’t the case, then speculators would always be losing money?

  2. Except in principles of political economy Mill takes the opposite view:

    When a speculation in a commodity proves profitable to the speculators as a body, it is because, in the interval between their buying and reselling, the price rises from some cause independent of them, their only connexion with it consisting in having foreseen it. In this case, their purchases make the price begin to rise sooner than it otherwise would do, thus spreading the privation of the consumers over a longer period, but mitigating it at the time of its greatest height: evidently to the general advantage. In this, however, it is assumed that they have not overrated the rise which they looked forward to. For it often happens that speculative purchases are made in the expectation of some increase of demand, or deficiency of supply, which after all does not occur, or not to the extent which the speculator expected. In that case the speculation, instead of moderating fluctuation, has caused a fluctuation of price which otherwise would not have happened, or aggravated one which would. But in that case, the speculation is a losing one, to the speculators collectively, however much some individuals may gain by it. All that part of the rise of price by which it exceeds what there are independent grounds for, cannot give to the speculators as a body any benefit, since the price is as much depressed by their sales as it was raised by their purchases; and while they gain nothing by it, they lose, not only their trouble and expenses, but almost always much more, through the effects incident to the artificial rise of price, in checking consumption, and bringing forward supplies from unforeseen quarters. The operations, therefore, of speculative dealers, are useful to the public whenever profitable to themselves; and though they are sometimes injurious to the public, by heightening the fluctuations which their more usual office is to alleviate, yet whenever this happens the speculators are the greatest losers. The interest, in short, of the speculators as a body, coincides with the interest of the public; and as they can only fail to serve the public interest in proportion as they miss their own, the best way to promote the one is to leave them to pursue the other in perfect freedom.

    1. Thanks for that. It now means I have to read the P of PE, which will bring great joy to my domestic life ….

      On the whole I believe the optimistic Friedman view rther than the Minsky one, but it is highly situational – I remember the dotcom boom like it was yesterday

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