@RichardJMurphy and commodity traders

Just as ordinary people the world over are abused by the higher prices commodity traders create,

Eh?

How does that work?

A commodity trader is just a fancy form of wholesaler.

Do we say that grain elevators, cash and carry supermarkets, cause higher prices for consumers?

Higher prices for producers, possibly, but that is to producer\’s benefit. And lower prices for consumers, as having that wholesaler in the middle is more efficient than every plumber in the country trying to have a direct contract with the lead smelter for some solder. This greater efficiency allowing higher prices received by producers (net) while simultaneously allowing lower prices for consumers (net)….which is exactly what higher efficiency actually means.

How are prices made higher by commodity traders?

And if they were made so, why wouldn\’t everyone by trying to contract direct?

Hell, I\’m a commodity trader and I know damn well why people buy from me, despite my making a profit from it. Because it\’s cheaper for them to allow me my profit than to do all the dreary searching around the world to find scandium independently. Instead of 20 people all doing the same work I do it and everyone gets a timeshare in the work done and a time share in the costs of having the work done.

Does the division and specialisation of labour mean nothing to him?

14 thoughts on “@RichardJMurphy and commodity traders”

  1. questions to which we know the answer:

    “Does the division and specialisation of labour mean nothing to him?”

    You should know better, Tim. this is part of the discredited neo-liberal economics that he disdained to study because it had no connection with real life.

  2. If the commodity trader sold dearer than the consumer could pay elsewhere, he’d go out of business.
    If the commodity trader offered less to the producer than he could get elsewhere, he’d go out of business.
    In order to stay in business, in a free world, you have to offer some benefit to the client.
    Beneficient = wicked. Funny old world.

  3. isn’t he just asserting that speculation moves prices? (although not always upwards).

    there is a reasonable argument that speculation can do just that (even some arguments it can without physical hoarding). And its reasonable to say that higher price are causing, on net, more harm than good.

    I know Murphy is a tool, but I don’t think you can dismiss the idea that commodity speculation is doing harm. This does not mean denying the useful roll of speculation as price discovery, it means thinking that sometimes it does more than that and creates bubble-like behaviour. I just means allowing for some financial market dysfunction.

  4. “And its reasonable to say that higher price are causing, on net, more harm than good.”

    Is it reasonable to say that? You can’t just – as the WGCE does – assert it as axiomatic. You need to show that the clear benefits of price speculation are outweighed by the costs.

  5. Speculation can move prices higher, but in the absence of magic, they cannot hold higher unless supply is constrained for some reason. In the 1990s, despite the best attempts and evil speculators, oil prices fell below $10 a barrel.

    Of course, bashing speculators is easy for a certain type of writer. That Murphy does so is as predictable as a wet English summer.

  6. Kay Tie,

    no, you’re quite right – although one can say that any departure of price from the “right” price has efficiency costs, the idea that needlessly high prices are bad rests on the idea that the poor are more consumers than producers of the relevant goods.

    see here:

    http://rodrik.typepad.com/dani_rodriks_weblog/2010/11/are-high-food-prices-good-or-bad-for-poverty.html

    and here:

    http://rodrik.typepad.com/dani_rodriks_weblog/2010/11/oxfam-responds-on-food-prices.html

  7. there is a reasonable argument that speculation can do just that (even some arguments it can without physical hoarding). And its reasonable to say that higher price are causing, on net, more harm than good.

    What are these reasonable arguments?
    And how is it reasonable to say that higher prices are causing, on net, more harm than good?
    As Adam Smith said, if there is going to be a shortage of something like food in the future, because of poor harvests, then the logical response is to cut back on food now so there will still be some around to eat in the future. Higher prices signal to do that, so they benefit the general population.
    The harm is caused by the underlying shortage, the high prices partially mitigate the effects.

  8. “the idea that needlessly high prices are bad rests on the idea that the poor are more consumers than producers of the relevant goods.”

    If that’s true, we have to ask why, and I suspect the largest reason why is the meddling and manipulation of governments (rich ones, like the EU, and poor ones like Egypt).

    (Sorry for calling the EU a government, Tim; please don’t hit me).

  9. and there is this strange belief that speculators never come to grief….does anyone recall Bunker Hunt who tried to corner the silver market and went bankrupt when the silver price collapsed?

    http://en.wikipedia.org/wiki/Bunker_hunt

    or even the case of the International Tin Council, which tried to maintain a high price for tin for the benefit of the producers and eventually went bust? They ran out of funds to keep the price high.

    http://en.wikipedia.org/wiki/International_Tin_Council

  10. Luis:

    Except in cases of a currency devaluation, all prices cannot increase; in order that some prices increase, others must decline. If the price of what you want to own goes down, you’re gonna be happy–just as you will be if the price of the stuff you want to sell goes up. That’s just how it works.

    The market rationalizes everyone’s economic activity: it gives every participant as much of every single one of his wants as is justified by his own productive contribution as evaluated by all those consumers.

    The complaints against the market arise primarily from those unwilling to abide the assessment of their contribution by their fellow men: they want more for what they sell than others are prepared to pay (and wish to curb the competing offers to purchase from others who wish to buy the same things).

    There’s no arcane knowledge nor extraordinary computation involved in understanding economics–just a long, tedious cause-and-effect chain leading to unsurprising conclusions for anyone interested and patient enough to follow each through to its end.

  11. @ diogenes
    The reason why Bunker Hunt went bankrupt is that the market traders who controlled the exchange unilaterally and retrospectively changed the rules when they realised that they (or too many of them) were bankrupt because their liabilities on shorting the silver market exceeded their assets. The USA has elected judges.
    The International Tin Council were trying to protect the (relatively poor) countries which were producing and exporting Tin – an example of failed social engineering.

  12. In a similar way, I remember estate agents being blamed for house price increases, as they were valuing houses at higher prices to earn extra commission……

    …..until house prices fell, when estate agents were blamed for reducing prices, because, though they might get less commission per sale, they would get more sales.

    *headbang*

  13. john77…thanks for the extra information – but I think it backs up the point that it can be very difficult to keep the price of a commodity higher than what the market would like, in the absence of supply shortages.

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