“Speculators may do no harm as bubbles on a steady stream of enterprise,” John Maynard Keynes wrote in the twelfth chapter of The General Theory of Employment, Interest, and Money, the best thing ever written on speculative markets. “But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

He wrote this in the 1930s, amid the economic wreckage of the Great Depression. The protracted slump was easily read as payback for the excesses of the previous decade, the great speculative mania of the 1920s. For a humane liberal like Keynes, the point of policy is to prevent manias and, failing that, to mitigate the inevitable fallout. That became the dominant view in mainstream economic and political circles for about four decades after the publication of his General Theory.

Even at the time, there were, of course, dissenters. Andrew Mellon, the US Treasury secretary who served under three Republican presidents from 1921 to 1932, famously advised Herbert Hoover to let the crash unfold in all its therapeutic splendor. “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system,” he implored. “High costs of living and high living will come down. . . . Enterprising people will pick up the wrecks from less competent people.” His words echoed those of Herbert Spencer, the brutal prophet of social Darwinism: “Cure can come only through affliction.” Or, as German finance minister Wolfgang Schäuble put it during the eurozone crisis, “Benevolence comes before dissoluteness.” When economic calamity hits, let it run its course, regardless of the human cost.

Mellon’s inclusion of “high living” in his prescription brings in some classically Protestant moralizing, as does Schäuble’s mention of “dissoluteness”: hard times are good for the soul. Speculation is sinful, for which penance must be done. The necessity of a purge after a speculative binge is a cornerstone of Austrian economics, the school associated with thinkers like Ludwig von Mises and Friedrich Hayek. Bubbly times brought about by easy credit lead to “malinvestment,” a misallocation of resources that can only be corrected through mass bankruptcy and unemployment. Even more critical left-leaning sorts took some pleasure in the purge that followed the 1929 crash. “One couldn’t help being exhilarated at the sudden unexpected collapse of that stupid gigantic fraud,” Edmund Wilson said.

But all this assumes good investment can easily be distinguished from bad speculation. Can it?

Keynes thought so. In the passage immediately preceding the one this article opened with, he wrote:

If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase. In one of the greatest investment markets in the world, namely, New York, the influence of speculation . . . is enormous. . . . It is rare, one is told, for an American to invest, as many Englishmen still do, “for income”; and he will not readily purchase an investment except in the hope of capital appreciation. This is only another way of saying that, when he purchases an investment, the American is attaching his hopes, not so much to its prospective yield, as to a favourable change in the conventional basis of valuation, i.e. that he is, in the above sense, a speculator.

In other words, if you buy a stock largely on the hope that its price will go up, you’re speculating; if you buy it for dividends (a notion that sounds quaint to modern ears), you’re investing. This points to a problem that’s observable throughout Keynes’s writing: he confuses an individual buying a stock with a firm making real investments in machinery and buildings. Even his notion of enterprise has an aspect of speculation about it, since it operates not through real capital (value that seeks expansion through profit, accumulated through the exploitation of labor) but through what Karl Marx called “fictitious capital,” a value that depends on a future stream of income — dividends in the case of stock, interest in the case of bonds.

Keynes’s proposed remedy for the vice of speculation even brought forth a Victorian streak in him: “The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils.” That’s odd for someone who once said, “I remain, and always will remain, an immoralist.”

But the closer you examine these distinctions, the odder they appear. The bubble of the 1920s, like many other bubbles before it and since, involved what turned out to be some very ill-advised real-world investments. Among the most notable — and not for the last time — was Florida real estate such as “waterfront” properties built ten miles from the nearest beach, or swampland sold as if it were fit for housing. But there were also scams centering on the new businesses of the decade, like electric utilities, chain stores, cars, airlines, radio, and movies.

Similarly, the great tech boom of the late 1990s starred now forgotten failures like Kozmo.com, which offered delivery of things like razor blades and DVDs within an hour at prices so low the proprietors lost money on every transaction, and Pseudo.com, a streaming company that had a vast studio in Lower Manhattan and got more floor space at the 2000 Democratic National Convention than established networks, only to collapse a few months later. Kozmo.com was funded by some of the biggest names in the business, like Chase and Flatiron, a major venture capital firm. Pseudo.com’s founder, Josh Harris, disclosed in 2008 that it was actually a “fake company,” “an elaborate piece of performance art” funded with $25 million in venture capital money.

Then, just a couple years after the dot-com bubble burst, we saw an immense housing bubble that led to massive overbuilding and insanely high prices. (We’ve just had another housing bubble that saw little building but even more insanely high prices.) Although housing and other forms of real estate can be the objects of massive speculative frenzies, there’s nothing more real-world than land and buildings.

Of course, none of these bubbles — and that goes as far back as the South Sea Bubble of 1720 — could have occurred without accommodating bankers and gullible investors. But they should remind us that the difference between real and speculative investment is often hard to discern.

And bubbles do, in fact, often result in lasting real investment. Along with a lot of worthless nonsense, the bubbles of the 1920s gave us some durable housing, highways, and a radio broadcasting infrastructure. The late 1990s bubble gave us Amazon.com (a mixed blessing, for sure, but an enduring presence in the real world) and millions of miles of fiber-optic cable set down on extremely bullish projections for future use. Companies like Global Crossing, which laid all that cable, went bust. But after several rounds of bankruptcies early in the 2000s, the usage projections eventually came true, and that dark cable was finally lit up. Amazon and the cable were both by-products of a casino, but they also contributed to the capital development of the United States.

Entrepreneurship itself is often hard to distinguish from speculation. Someone who is launching a new firm, or an established firm that is launching a new product, is taking a risky plunge without knowing whether their adventure will find a profitable market. The Italian economist Vilfredo Pareto, who loved classifying people and groups into types, included entrepreneurs alongside speculators in one of his typologies, in contrast with rentiers, who live on income from their assets:

Entrepreneurs are in general, therefore, adventurous souls, hungry for novelty in the economic as well as in the social field, and not at all alarmed at change, expecting as they do to take advantage of it. The mere savers, instead, are often quiet, timorous souls sitting at all times with their ears cocked in apprehension like rabbits.

These savers sound very much like Keynes’s investors, living in covenant marriages with their stocks and bonds. Under capitalism, can there be capital development without speculation?

Politically, Pareto argued, the saver branch of the capitalist family was alarmed by wage increases, since any ensuing inflation would eat away at the value of their savings, but the speculator-entrepreneur branch could live with them by raising prices or undertaking new enterprises. Speculators and entrepreneurs are thus the driving force behind the transformations that characterize capitalism at its most dynamic, the side of capitalism that Marx and Friedrich Engels celebrated in the Communist Manifesto; it’s the dour savers who are agents of stagnation and austerity.

It’s simply not so easy to disentangle real enterprise from speculation, though only the latter is spoken of as a sin. And it’s that kind of moralistic understanding that obscures the real functioning of our economy.

Few areas of finance are viewed with as much scorn as derivatives, some of it deserved, some of it not. Derivatives are a broad category, defined most simply as financial assets whose price depends on the price of other assets. The simplest sort is a futures contract, which requires a holder to buy or sell — depending on the contract they’ve entered into — the underlying commodity on a fixed date.

Take wheat futures, one of the most venerable of the breed. The standard US contract is for five thousand bushels, or 136 tons, with fifteen contracts reaching maturity dates every two to three months over the following two years. The classic examples of the utility of such instruments are that wheat farmers may want to lock in a price for their crop for sale in some future month — or, on the other side, Pillsbury might want to lock in a purchase price for inputs to its flour business. In the trade, such practices are known as hedging.

That all sounds very sober, but complications immediately present themselves. A true hedger has no feelings about where prices might go; they just want to lock in a predictable, stable sale or purchase price, no judgments. But maybe they have a feeling about where prices will go, and they engage in selective hedging, which is when you lock in a price if you think it’s going to move against you (up for a buyer, down for a seller) but not if you think it’s going to move in your favor.

Further complicating things is the fact that the party on the other side of a trade is often speculating. Nebraska wheat farmers might choose not to sell a contract on their next crop because they suspect prices will rise, or Pillsbury might choose not to buy one because it thinks prices will fall. In this case, not hedging is actually a form of speculation.

Homilies about futures contracts, designed to counter their disreputable association with speculation, have classically relied on agricultural examples like grains. Not only do they seem firmly anchored in the real world; they’re also the oldest such instruments around, stretching back to 1865 in the United States and further back to eighteenth-century Japan. Things have changed mightily. Starting in the 1970s, futures contracts were introduced on financial assets, like Treasury bonds, stocks, and foreign currencies.

But while the underlying assets are intangible rather than physical, you can spin similar exculpatory stories around them. A multinational corporation, for example, which does business in many currencies, might want to fix its exchange rates over the next year or two by using futures contracts, a sober business practice. But it could also hedge selectively, and that thrill-seeking retired dentist might want to make a bet on what the value of the Japanese yen will be six months from now.

Tales of hedgers aside, futures markets depend crucially on the presence of speculators. Maybe there wouldn’t be enough Nebraska farmers selling contracts to satisfy Pillsbury’s demand to buy them, or vice versa. But maybe some retired dentists — or, more likely, hedge funds — have strong feelings about where wheat prices will go, and they buy or sell. These trades from what are called noncommercial users provide the market with some liquidity, adding depth to the ranks of buyers and sellers. (In fact, only a minority of wheat contracts are held by commercial users.) In any case, once again it becomes difficult to separate the functions of real enterprise and speculation.

For some observers, the financial markets themselves are irredeemably speculative, and anything too far removed from making things or moving them about is morally suspect. This position isn’t entirely wrong, but it is incompatible with capitalism, given the pervasiveness of the speculative spirit even in the act of making things for sale — you never know if there’s going to be a buyer, so you’re always (to some degree) what those in the eighteenth century called a plunger. Even things that once seemed like the safest of bets can disappear as technology and markets change.

However, there’s an aspect of the markets that people who only focus on price movements might overlook: they’re real instruments of power and control. That angle is an important part of the economic history of the last several decades, beginning with the shareholder revolution of the early 1980s. From the time of the 1929 stock market crash through the Great Depression and into the early post–World War II decades, the stock market barely counted in the running of actual companies, even though stockholders are their ultimate owners. Stocks were mostly held by individuals who couldn’t coordinate their actions with one another. Managers ran corporations, and stockholders sat back and collected their dividends. It was a time when Keynesian “marriages” defined the relationship.

This was an enormous change from the decades before the 1929 crash, when financial operators dominated corporate policies. That cataclysm and the ensuing depression left Wall Street in disgrace for thirty years and largely quiet for fifty. Besides, corporate America was doing well. Profits were strong, and stock prices rose.

Things started going sour in the 1970s as profits sagged and stock prices along with them. The corporate class thought the working class — sullen, troublesome, unproductive — was out of control. These issues were addressed in the political realm with the neoliberal turn at the Federal Reserve led by Paul Volcker, who drove interest rates toward 20 percent, creating the deepest recession since the 1930s, and Ronald Reagan, who broke unions and cut social spending. This crackdown deeply scared the working class out of what its bosses saw as its “bad attitude.”

At the same time, Wall Street woke up from its hibernation. The features of the 1950s and ’60s that kept stockholders happily inactive — good performance and widely dispersed ownership — changed, as performance turned miserable at the same time that ownership became more concentrated in the hands of institutions like mutual funds and pension funds. A somewhat disreputable crew of takeover artists, using mostly borrowed money, launched wars on what they saw as underperforming corporations throughout the 1980s, buying up their stock and displacing management.

In their eyes, CEOs were wasting money on investment, employees, and their own perks rather than distributing it to their ultimate bosses, the shareholders. The raiders demanded aggressive cost cutting and a single-minded focus on getting profits and stock prices up. Outsourcing, layoffs, and speedup became the order of the day. The sense of perpetual insecurity still experienced by the contemporary working class has its roots in this period.

As the 1980s turned into the 1990s, the effects of the shareholder revolution were institutionalized. The corporate raiders wanted managers to think like shareholders, and compensation schemes were rejiggered largely to be denominated in stock rather than salaries. Getting the stock price up was now as much in the CEO’s interests as it was in the shareholders’. The revolution was marked by lots of speculation — hugely overvalued takeovers financed by gobs of borrowed money — and it profoundly transformed the American corporate landscape.

Often an exercise like this, one intended to blur some distinctions that most people perceive as clear, leaves a reader confused. But that confusion reflects a reality: the distinction between enterprise (or real investment) and speculation is no more valid than the one between the monetary and the real economy. These categories may mark poles on a spectrum, but the closer you look, the harder they are to distinguish. Money is valorized by real-world transactions, but there can be no real-world transactions without money. And while there are moments in history when speculative energies predominate over “realer” ones, there have been few periods in American history where the two pursuits have not been traveling companions.

Distinctions like these, however, are often favored by apologists for capitalism: if we could just wipe away the speculative froth and get back to a determined industriousness, everything would be a lot better. It would be — but capitalism won’t do that for you. Even the most industrious enterprises, ones set up to sell fundamental use values like food, clothing, and shelter, depend on the pursuit of profit. Since there’s no guarantee the capitalist can sell the products, it’s an undertaking that is ultimately speculative. For truly industrious enterprise, we need some socialism.