One of my husband’s many incisive stories from his career as an educator reports on an incident in the teachers’ lounge at a high school after an exam. In comes one of the more senior teachers, griping about his students’ poor performances: “I’ve given the same exam now for 20 years, and they still get the same questions wrong.” My husband, of course, thinks the teacher’s complaint reflects more on the teacher’s weaknesses than on the students’.
I was reminded of this story by University of Houston Finance Professor Craig Pirrong’s blog post complaining that although he has been making the same argument since 2008, the critics of speculation still don’t get it. Speculation, he claims to prove, cannot cause price levels to trend up.
In his blog, Professor Pirrong’s favorite pose is ridicule, and this post is no exception. He proclaims his argument is just an application of basic finance theory, which the critics of speculation are too dim to appreciate. But, a number of well credentialed economists who are well versed in basic finance theory take exception to Pirrong’s argument. In particular, I’ve written elsewhere that speculation can cause the price of oil to trend up. We can have a reasoned argument about speculation and price levels, but it’s time to drop the ridicule.
Like the pompous high school teacher who wielded his authority against his students, Professor Pirrong brandishes his knowledge of finance against the untrained complaints of the public about speculation and proudly announces himself the victor. It is true that many of the untrained critiques of speculation imagine a simple, overly mechanical relationship between the volume of speculation and the level of prices. But where is the glory in taking an untrained critique and finding a flaw?
The volume of speculation matters. It may not be a regular direct cause of a price bubble or other problems in a commodity market. But it can be a symptom and it can be an indirect cause and it can also occasionally be a direct cause. Ignoring the volume of speculation is foolhardy.
Professor Pirrong is extreme in the weight he gives to ridicule in his argumentation. There are plenty of other economists who share his underlying critique, while maintaining a more respectful demeanor in the conversation. The annual convention of economists is taking place right now, and the issue of commodity speculation is on the agenda in a couple of sessions, including one on Saturday afternoon sponsored by the International Association of Energy Economists and the American Economics Association. There will be plenty of space given to the critique that speculation has not been responsible for moving prices. But there will also be presentations by other credentialed economists whose talks will reflect the same stubborn ignorance of the basic finance for which Professor Pirrong chides less credentialed critics. I will be among them. I’m looking forward to a substantive discussion free of invective.