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Speculation, Law, and the Market Process


After Hurricane Andrew devastated the southern part of Florida, the state’s attorney general threatened to prosecute “price-gougers” and speculators for charging exorbitant prices for food, ice, plywood, and other essential items.

The Power of government officials to regulate prices and to punish speculators is not new. It stretches back centuries. Since the laws of most American states are based on the common law of England, let us examine price regulation and laws against speculation in the context of English legal and economic history.

Economic activity in 11th-century England was characterized by the growth of a new phenomenon: local fairs that became major trading centers for the people in the surrounding areas. Sellers purchased stalls in the fair where they would sell their wares. Goods of all types could be found — the most important, of course, being bread and other foodstuffs. Not just anyone could hold a fair, however. This important activity was limited to those privileged individuals who had received a grant from the king. The fair was a classic example of a monopoly: only those who had royal authority could hold a fair, anyone else who tried was shut down and severely punished.

The prices of the items sold at the fairs were strictly regulated. In the early days, they were regulated by local authorities. Over time, the king and Parliament also assumed the power to regulate prices. Everyone assumed that price regulation was necessary and legitimate to protect consumers — and especially the peasants — from exorbitant prices.

Thus, in order to maintain low prices, the common law of England developed crimes against speculation. There were three offenses under the common law that were later codified by Parliament: forestalling, engrossing, and regrating.

Forestalling prohibited a person from purchasing goods before they reached the local fair. The authorities did not want speculators to contact the sellers before, they arrived at the fair, purchase their goods, and then sell them at a higher price. Such speculative activity would only harm the peasants and possibly the fair operators who might be deprived of their stallage fees.

Engrossing prohibited people from trying to “comer the market.” Regrating prohibited people from “retailing,” i.e., purchasing goods in bulk and then reselling them as individual items.

These economic crimes were brutally enforced by the English authorities from the 11th century through the 18th century. Penalties included forfeiture of the goods, pillorying of the offender, banishment from the area, and sometimes even death. And public opinion fully supported the enforcement of these measures. People hated what they considered were the evil, immoral attempts of speculators to profit from the misery and desperation of the masses. A writer in the 17th century described the public’s attitude toward speculators:

“Forestallers, engrossers, and regraters, deserve to be reckoned amongst the number of oppressors of the common good and public weal of the realm, for they do endeavor to enrich themselves by the impoverishment of others, and respect not how many do lose, so they may gain. . . . He is a manifest oppressor of the poor and a decayer of the rich, a public enemy of the country, a canker, a moth, and a gnawing worm, that daily wasteth the commonwealth.”

Why was there so much resentment against speculators? Because during this entire period, people were threatened by one of the most terrifying experiences in history: the famine. It is difficult to imagine how bad living conditions were when famine all too frequently struck the populace. An old English writer described conditions in England in 1314: “No fleshe coulde be had, Capons and Geese could riot be found, Egs were hard to come by, Sheepe died of the rot, Swine were out of the way. . . . Horse flesh was counted great delicates; the poore stole fatte dogs to eate; some did eate the flesh of their owne Children and some stole others which they devoured. Theeves that were in prisons did plucke in pieces those that were newly brought amongst them and greedily devoured them half alive.”

What was the response of farmers, merchants, and speculators when crops would fail? To raise the prices of their goods! Imagine the outcry of the desperate masses to this “outrageous” and “immoral” conduct. Thus, when crop failure occurred, the populace demanded — with success — that the authorities alleviate the impending doom of the famine by mandating low prices and severely punishing those who would profit by charging high prices.

Price regulation, punishment of the speculator, and famine — they went on for centuries. But during the 18th century, the citizenry began asking some uncomfortable questions. By raising prices, especially in times of crisis, were merchants and speculators actually performing a valuable service for the populace? Did price regulation and crimes against speculation actually make matters worse for the masses?

The English citizenry reached a conclusion that would have baffled their ancestors (as well as present-day Americans): they concluded that the answer to these two questions was yes. And the Parliament committee appointed to look into the matter reached the same conclusion! The result was that in 1772, Parliament repealed the laws prohibiting forestalling, engrossing, and regrating. The reasoning was found in the repealing statute:

“Whereas it hath been found by experience, that the restraints laid by several statutes upon the dealing in corn, meal, flour, cattle, and sundry other sorts of victuals, by preventing a free trade in the said commodities, have a tendency to discourage the growth and to enhance the price of the same … [and have brought] great distress upon the inhabitants of many parts of this kingdom….”

Thus, two hundred years ago, the English people figured out what Florida’s current attorney general and most present-day Americans (as well as most other people around the world) have yet to figure out: that “price-gougers” and speculators are vitally important messengers, especially in times of crisis. By raising prices of scarce commodities, they tell sellers in other areas to ship in goods, and they tell buyers to consume less until the scarcity is alleviated. Thus, they cure the crisis!

When Adam Smith Published his great treatise, The Wealth of Nations, in 1776, he explained that these laws that had been designed to help the poor had actually caused the conditions for their starvation. And he pointedly noted, “The popular fear of engrossing and forestalling may be compared to the popular terrors and suspicions of witchcraft.”

The repeal of these laws — as well as many other economic regulations in England — had, of course, many significant results. But the most important one of all was this: no more famines! And the same was true for the United States, which also adopted this dramatically different view of the state’s role in economic activity: despite periodic years of crop failures, no famine has ever occurred in the United States. Unfortunately, however, mankind in our time has harkened back to the old, bankrupt idea that held people in its grip for so many centuries: the idea that government should regulate prices and economic activity. The result, of course, has been famine in Africa; impoverishment in Asia, the former Soviet Union, and South America; and depressed economic conditions in Europe and North America.

Is there a solution to all of this? Yes, but unfortunately it is as unpopular as it has been throughout most of history: Exalt the businessperson and the speculator! Free therefrom all restrictions! And prohibit governments from ever regulating their activities again!

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    Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.