Is Speculative Investing Immoral?

Recently, Catholic YouTuber Matt Fradd invited Jacob Imam and Trent Horn onto his highly popular Pints with Aquinas show to debate the motion Is it generally immoral to invest in 401(k)’s for retirement? Imam defended the affirmative motion and Horn defended the negative. Based on the lively exchanges in the comments, not to mention the sheer number of text messages I received from friends, the debate struck a nerve. 

This article will dive into an important but relatively unexamined disagreement, that is, the utility of speculation. 

First off, let us address the curiously specific topic of this debate: condemning the 401(k) account specifically. While this topic as advertised was discussed briefly, the choice of title was more of a head fake. Instead, the title served more as a catchy headline presumably to attract eyeballs on the YouTube homepage (it worked!). The most spirited back-and-forth, and the meat of the debate, had nothing to do with the 401(k) plan. The real debate was on speculation itself. 

In other words, the morality of buying low and selling high was the bulk of the disagreement. Here are Imam’s words:

The person who makes money for his retirement through a 401(k) buys stocks low and sells them high, making a profit without adding any value to it. This is what St. Thomas Aquinas calls cheating.

Speculation, as Imam puts it, is immoral when your own labor is not added (or something to that effect). In the discourse, Imam also provides quotes from St. Augustine, St. Thomas Aquinas, and St. John Paul II that seem to bolster this point. 

Where I find common ground with Imam is that in an inflationary economy created by fiat money (like our own), reckless speculation becomes an overly large portion of economic activity. This is because prudent families cannot merely save money when the money does not hold its purchasing power. Here is Jörg Guido Hülsmann in The Ethics of Money Production:

Under a paper-money standard…[s]uch speculation occurs on a large scale, because people know that paper money can be produced in virtually any quantity. It is really just a matter of good will on the side of the producers. It follows that more or less all market participants will tend to be more reckless in their speculations than they otherwise would have been—a sure recipe for wasteful use of resources and possibly also for macroeconomic collapse. 

In this passage, Hülsmann seems to distinguish reckless speculation from speculation per se. We might say that during periods of inflation there is more reckless behavior and more uninformed speculators than in a naturally ordered economy. 

I should point out that I find the Catholic Hülsmann, a member of the Pontifical Academy for Life and a proponent of an Austrian free market approach, as someone who provides the right nuance in this discussion. He addresses Imam’s best critiques in a way that Horn lacks in his more conventional rhetoric. 

As for reckless speculation, I immediately think of the “Davey Day Trader” phenomenon in 2020, during the period when professional sports were shut down because of Covid. Here, the bro CEO of Barstool Sports reinvented himself as a gambling-addict-turned-trader to millions of viewers on Twitter who tuned in to watch the train wreck unfold. We might call this sort of behavior reckless speculation.

By comparison, I like to tell the story of Bill O’Connor, a Catholic father of 6 (later topping out at 10) who, in the 1950s, met a young Warren Buffett in a card game. O’Connor was so impressed that he invested the family’s humble life savings in Buffett’s early partnership. This speculation (along with the Spartan-like patience to not sell) paid off handsomely over many decades. As a result, the arc of the family’s generations was changed. The O’Connors sent over 60 grandchildren to Catholic universities and gave away tens of millions to charity. We might call Bill O’Connor’s investment correct speculation.

In responding to Imam’s arguments on speculation, it seemed like Horn was slightly caught off guard. To his credit, he offers several examples of speculation, like the relatively wholesome practice of buying a new set of baseball cards and holding on to them as they appreciate in value over time. In these examples, Horn incredulously wonders out loud why these acts would be considered immoral. 

But instead of merely begging the question, I would have loved to have seen Horn defend the work that speculators do in creating price discovery in an economy. In buying low and selling high, intelligent speculators correct mispriced assets and provide essential information on which and what quantity of goods should be produced. A speculator’s actions actually do something; that is, they move the market! Here is Robert P. Murphy:

Speculators are out to make money, to buy low and sell high, as the cliché goes. What this truism entails, however, is that the successful speculator—who can consistently buy low and sell high—can predict certain stock prices better than others…

If this were the whole story, then stock speculation might truly be a zero-sum game, where the lucky or farsighted enrich themselves at the expense of the unlucky or dimwitted. This isn’t the case, however, because in the very process of profiting from their superior vision, stock speculators influence stock prices. When stock prices are undervalued, the successful speculator buys shares, an action that drives up the prices in question. 

So, contrary to Imam’s argument, correct speculation is real work that does an important social function: setting a price for a company’s shares. 

Alternatively, a society without prices is a society in disorder, as in the case of Soviet Russia. Here we witnessed an empire containing vast natural resources that somehow managed to achieve, of all things, food shortages. I believe it is no coincidence that there was no stock market in 75 years of the existence of the U.S.S.R. 

So, we cannot emphasize enough the importance of price signals in directing goods and services to the places they are needed most. As John Tamny describes:

In truth, all economic activity is speculative, and to curb any form of speculation would be to halt economic progress. And as opposed to an economic weight, speculators perform an essential economic function by hastening the process whereby prices adjust in order to match supply and demand. If the world didn’t have speculators, we’d have to invent them. Without speculators, our very existence would be characterized by a great deal of drudgery and want.

So, recognition of the social good (or lack thereof) of speculation must acknowledge the utility in discovering price signals. Granted, this point is much further “in the weeds” of economic discourse than the casual viewer of a popular Catholic YouTuber will typically want to go. Even in traditional finance I have noticed that my own peers don’t attempt to wrestle with this point directly (“investing is NOT speculating”). In the Pints with Aquinas 401(k) debate, Imam (wrongly, in my opinion) condemns speculating entirely, whereas Horn only goes as far as to defend it implicitly. 

It seems that we need to give intelligent speculation its due and distinguish it from the true financial insanities of our time, such as the cultural and spiritual legacy of fiat inflation.

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