Mark Braund should really try reading Adam Smith

The same happens with speculative investments in tangible commodities like oil or wheat. Again, speculators have no use for the commodity in question, but they drive up prices for those who do. We all contribute to the unearned wealth of speculators each time we put fuel in our cars. And in poor countries, hungry people pay with their lives when wheat prices are driven up beyond the means of governments to import sufficient to cover the shortfall in domestic production.

The bit you need Mark is Book IV, Chapter 5, starting at paragraph 40, of the Wealth of Nations.

That\’s where Smith points out the value to us all of having someone speculating in wheat.

Only 235 years old now the explanation. Should have sunk in by now, don\’t you think?

7 thoughts on “Mark Braund should really try reading Adam Smith”

  1. The really worrying part about this is the belief that it is governments that need to import stuff

  2. …….but as a result of a conscious effort by people with spare cash to subvert the natural workings of the economy……..

    Speculators are not out to subvert anything, unless it is the gravity defying exploits of the political class. They make their money by spotting inconsistencies, or unsustainable prices.

    Subversion is called manipulation, not speculation.

  3. Tim, I know what Smith wrote 235 years ago, and don’t dispute the contribution of speculation to the pricing mechanism in commodity markets. But having read Smith, especially The Theory of Moral Sentiments, I wonder if, were he alive today and had therefore witnessed the developments of the last two centuries, he wouldn’t be closer to my position than yours? Pure speculation of course.

    Mark: Glad we’re mates, but total lefty, not really. I’d love to see a much smaller state, but it ain’t going to happen while the economy fails to provide opportunities for so many people.

    Emil: I don’t believe governments should need to import food to feed their populations, but when people can’t feed themselves because all the best land has been given over to cash crops to earn money to pay off loans that should never have been made in the first place…

    Serf: Perhaps I should have distinguished between speculation in markets and manipulation of markets. I think most of what goes on today under the guise of speculation is, in fact, manipulation.

    Tim adds: “Perhaps I should have distinguished between speculation in markets and manipulation of markets. I think most of what goes on today under the guise of speculation is, in fact, manipulation.”

    Well, if you’d actually said that, we’d all be in agreement. The first sentence at least. Now we’ve the difficult task of working out what bit is speculation and what bit is manipulation, no?

    For example, let us take the food price rises in 2006/8. In order for them to be manipulation we’d need to see a rise in physical stocks, as people purchase and then hold off the market food so as to make the price rise.

    Did we see a rise in physical stocks? No, we didn’t actually, we saw a fall in them. So, 2006/8 wasn’t a case of manipulation then.

    Are we agreed so far? If not, why not?

  4. he wouldn’t be closer to my position than yours? Pure speculation of course.

    My take on Adam Smith was that he was a smart, data driven guy who tried to base his beliefs on evidence and good arguments. I don’t think he always achieved this, but, well, we’ve had over 200 years for someone to point out a flaw in his argument about speculators benefitting everyone, and no one yet has. I think that, given current evidence, he’d still stick with his original argument, rather than agreeing with you.

    Take for example your statement that: But speculators don’t generally make use of the land they own; they want it simply because it grows in value.

    Well, why would the land that the speculators own grow in value? Because eventually they expect to sell it to people who want to use it. Take your hypothetical case where land values rise so much that people who can actaully use it for something valuable can’t afford it. So the value of the land that the speculators own will fall. And how long are the speculators going to sit around paying rates on land that they’re not using for anything productive, and the prices are falling?

    Your statement about currency trading is even worse. Not only can currencies be played off against one another, regardless of the consequences for the citizens of countries so targeted,

    What does it mean when you say that currencies can be played off against one another? If someone buys a currency then someone else must sell it, and equally if someone sells a currency then someone else must buy it. You can’t have a buyer without a seller. Currencies aren’t played off against each other, currency purchasers play against currency sellers.

    What are the consequences? A lower exchange rate benefits exporters and local suppliers of traded goods, and costs importers, a higher exchange rate benefits importers and costs exporters and local suppliers of traded goods. What’s the argument for caring more about one group than another?
    The only problem is when a government decides to become a currency player, trying to move the exchange rate to a particular level, and thus exposing taxpayers to paying the costs incurred if the government makes a bad speculation. For that reason, I don’t think governments should speculate in currencies. (Obviously governments do have some needs to buy foreign currency, eg for supporting embassies, I’m not saying that governments should never buy or sell foreign currency).

    And then you go on to make the same mistake again with CDSs: Among these are ‘naked’ Credit Default Swaps, whereby investment banks, hedge funds and institutional investors intentionally put themselves in a position to benefit from sovereign debt defaults,

    Okay, let’s start with what a credit default swap (CDS) is. A CDS is a contract where if the loan it’s written on defaults, the buyer of the CDS can exchange, or swap, it with some other asset (possibly cash) for the face value of the loan. Now, for this to happen, there must be a seller of the CDS, who is willing to provide some asset that they will swap for the defaulted loan. And it must be a person that the buyer of the CDS thinks has at least a decent probability of being able to actually collect on, no point in buying insurance if your insurance company has a high probability of high-tailing it when the bill comes due. Well, who is likely to be selling CDSs? Investment banks, hedge funds and instituional investors (I’ll call them all investors). So for every investor intentionally putting themselves in a position to benefit from sovereign debt defaults, some other investor is intentionally putting themselves in a position to lose even more from sovereign debt defaults.

    As far as I can tell, you’re only thinking about one side of the question. You’re thinking of speculators buying things, without ever considering that things can only be bought if something is sold.

  5. “speculators have no use for the commodity… but they drive up prices for those who do.”
    I can see how this sort of thing goes dow well in the Guardian JCR, but is it economics?
    Since speculators neither produce nor consume they can have no net effect on either supply or demand.
    So how do they drive up prices?
    Maybe in the same way as stockbrokers have driven the Footsie bubble from about 6,000 in 1997 to about 6,000 in 2011?
    Or how wicked capitalists on the Mogadishu Commodities Exchange have caused a local famine?

  6. Data on the stocks of many commodities is really underdeveloped so I’m not sure we can assert stocks did not rise.

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