Wednesday, June 18, 2008

Unlearned Lessons from the Past

From Micha Gherter on the The Distributed Republic (17 June) HERE:

“Times Sure Have Changed Since Adam Smith”

“The Republican presidential nominee, John McCain, speaking on June 17, 2008 [via Matt Welch]:

There is the further problem of speculation on the oil futures market, which in many cases has nothing to do with the actual sale, purchase, or delivery of oil. [...]
[W]e all know that some people on Wall Street are not above gaming the system. When you have enough speculators betting on the rising price of oil, that itself can cause oil prices to keep on rising. And while a few reckless speculators are counting their paper profits, most Americans are coming up on the short end -- using more and more of their hard-earned paychecks to buy gas for the truck, tractor, or family car.

Investigation is underway to root out this kind of reckless wagering, unrelated to any kind of productive commerce, because it can distort the market, drive prices beyond rational limits, and put the investments and pensions of millions of Americans at risk. Where we find such abuses, they need to be swiftly punished. And to make sure it never happens again, we must reform the laws and regulations governing the oil futures market, so that they are just as clear and effective as the rules applied to stocks, bonds, and other financial instruments. In all of these markets, reform must assure transparency, prevent abuse, and protect the public interest.”

I added the following comment to the post which quoted from Wealth Of Nations, though I am not sure that 'times have changed' because hostility to trading merchants was pretty violent before and during Smith's days:

Adam Smith was not just talking about 'speculation', which may or may not have a positive role; he was talking about the necessary role of distributors of the products of individual farmers who wee prevented from selling their produce to middle-man (the 'engrossers and forestallers') who would transport the produce to areas where demand for it was highest - hence where prices were highest and thus reducing excess demand and lowering prices (Wealth of Nations, Book IV, chapter 5, paragaphs 8 - 31, pp 528-34).

He favoured letting farmers specialise in farming, and 'engrossers and forestallers' (impolite names for wheat, etc., merchants) specialise in distribution. He said that regulating against merchants turned dearths into famines because the trade went secretive and when hungry people were angry people the risks of trading increased and prices became even higher.

Preventing oil price speculation in New York would not reduce the price as expected by politicans. Anybody with sufficient funds outside the USA can speculate on oil prices, which raises them in the USA anyway.

Prohibitions on oil - as on alcohol yesterday, and on drugs today -
will make a bad situation worse. What's Plan B then?


Blogger Unknown said...

Speculation on oil will not raise prices unless the speculator raises his stockpile of oil barrels.

3:02 pm  
Blogger Gavin Kennedy said...

I hope you are right in that contention.

If people buy or sell oil forward at some time the oil has to exchange hands along with the money. This activity influences price makers' judgements about the price of oil now and what they should sell or buy it at.

Smith was complaining about stopping traders moving corn where it was to where it could be sold at higher prices.

What politicans expect to gainf rom turning their wrath on commodity traders is not clear. It won't produce more corn.

1:01 pm  

Post a Comment

<< Home