What’s a Christian to Make of Speculation?
Acton Institute Powerblog

What’s a Christian to Make of Speculation?

The practice of speculation draws mixed reactions among Christians, as some believe it is intrinsically evil and others see great good coming from it. Over at Legatus Magazine, Acton’s Director of Research, Samuel Gregg, hopes to shed some light on whether or not Christians should engage in speculation. The Roman Catholic Catechism condemns specific types of speculation, but Gregg argues that the practice could be justified in other situations not addressed by the Catechism. However, before Christians accept or reject it, it’s important that we understand this financial tool in all its complexity. Gregg quotes the Catholic Catechism:

The Catechism of the Catholic Church identifies “speculation in which one contrives to manipulate the price of goods artificially in order to gain an advantage to the detriment of others” as “morally illicit” (CCC #2409).. This wording indicates that there are legitimate forms of speculation, though these are left unspecified.

He continues:

The justice of different choices denoted as “speculative” depends upon the specifics of a given choice. Speculation that relies, for instance, upon telling falsehoods is wrong because choosing to lie is, in Christian terms, always wrong. It would be equally unjust for a financial firm to try and manipulate the futures market by expressing to others excessive optimism or negativity about the prospects for a given commodity.

These examples are very different from the type of speculation that involves making prudential judgments about what one buys and sells on the stock market in light of what one judges is likely to happen in the future on the basis of knowledge, experience and evidence. Speculation can be abused or used badly. But just because some banks issue credit to the wrong people doesn’t mean we should eliminate credit altogether, nor does misuse of speculative techniques necessitate a severe curtailing of speculation.

There are also greater and lesser degrees of speculation, depending on the size of the “bet” and how much one can reasonably forecast for the future. When a bank, for instance, grants a two-year small loan to an established business with a track record of on-time loan repayment, it does so with a high degree of certainty that the loan will be repaid.

The scale of the speculation — and the risk — increases in the case of, for instance, a hedge fund that chooses to borrow a large amount of money in order to speculate upon the future worth of a given commodity or currency over varying periods of time. “Forward dealings,” as they are called, seek to capitalize upon expected price movements that enable me to sell high and buy low. This can involve buying products, shares, or commodities in the expectation that, in the meantime, prices will fall (a “bear” transaction) or rise (a “bull” transaction). The degree of uncertainty surrounding all these factors means that the speculative risk is usually higher than a standard small-business loan.

Gregg concludes by discussing the good that can come from it, but also the need for judgment before any speculating:

We should also be attentive to the ways in which speculation can contribute to the better use of economic resources. Speculation —  be it in currencies, food, commodities — can, for instance, contribute to the relative stability of economic life by helping to calibrate the supply and demand of many goods beyond the short-term.

Much more could be said about speculation. In specific conditions, it can certainly have negative effects. But before Catholics condemn (or unreservedly praise) speculation, it’s important that we understand this financial tool in all its complexity. Only then can we render judgment on an act of speculation in the marketplace.

Read ‘Understanding Speculation’ in its entirety at Legatus Magazine.