Investment return

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    Professor Herbener, I recently watched a documentary on the subject of the wealth distribution in America. They interviewed a wealthy CEO who stated that he can only spend so much of his huge income on consumption (he assumes of course that consumption spending is the only way he can benefit the economy) and the rest of his income is placed into a hedge fund whose goal is to maximize his return and doesn’t benefit the economy in any way. I tried to come up with a refutation of this claim in a way that would make Rothbard proud and I would appreciate if you would give me a critique of my reasoning. My response is:

    -There are only two ways to earn a return in a free market: 1.) enter the time market, or 2.) to speculatively invest in some financial asset or some good in general with the expectation that its price will rise.

    1.) One may enter the time market by either a.) investing in the production structure with its obvious benefits to “the economy,” or b.) providing personal loans which, while some may consider it exploitative, nevertheless freely satisfies the time preferences of individuals.

    2.) In the case of speculative investment one expects that the current market price of some good is less than the equilibrium price and invests accordingly. If they are correct they aid the economy by allowing it to more quickly adjust to the change and if they are incorrect they hurt no one but themselves.

    Is my reasoning correct and do you have any suggestions?

    Thanks again.


    I think your reasoning is sound. The role of speculation in economic efficiency is certainly under-appreciated.

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