Don’t worry, Tim Worstall will be along shortly to tell you how better off these starving people are thanks to our top-heavy capitalist global economy.

Perhaps the water cannon is an object lesson in the trickle-down effect?

“The year of ‘mea culpa’ is apparently over as bankers return to beating their chests and sneering at the very idea that the little people should have imagined they could really interfere.”

Socialise the costs and privatises the profits. This is the philosophy of the global elite. And their puppets in govts are carrying out with relish, while claiming we are all in this together.

I don’t usually agree with Redwood, but maybe the answer was to let a whole lot of these banks go bust. Certainly the anger of the top brass at Lehman brothers was a sight to be seen. They are still frothing at the mouth that their puppets let them go to the wall. Trouble is, so many little people would have lost most of their money, and the whole system might have come crashing down. But to see these lazy, welfare scrounging tossers lording over us is not a pretty sight.

Ahem: http://www.heritage.org/index/Ranking

Only non-market states starve their own people.

“Don’t worry, Tim Worstall will be along shortly”

Taah Daah!

And he is here.

A couple of minor points: the Mozambique riots for example were precisely sweet FA to do with rising global food prices. They were due to a reduction in the subsidy the local government gave to bread. And Egypt has very much the same system, the government hugely subsidises the price of bread.

Secondly, the 2008 rises, the ones now, don’t require food speculation to be explained. 2006-2008 was when the US and EU governments decided that it was better to put food into cars instead of people: biofuels. This caused huge potential shortages, so of course there was a price rise. We’ve got bad harvests around the world this year, who is at all surprised by a price rise?

But on to the major point. Let’s, just for the purposes of this argument, agree that speculation drives up the price of food. We’ll ignore that futures markets are a zero sum game, for every profit there must be an equal and opposite loss. We’ll ignore that there was no great change in regulation of commodity derivatives in the 1990s. We’ll just say, yup speculation drives up food prices.

At which point we have to say my word, isn’t that a good thing?

Biofuels in 2006, bad harvests now. This means that in the future food is going to get more expensive. Because, if we just carry on as we are now then at some point, either because we’re putting food into cars or because we just didn’t grow enough this year, we’ll go to the granaries and ooops! there’s no wheat! (or corn, rice, whatever).

Food, I think we’ll all agree, would get pretty expensive just then. Could have really rather large riots, possibly even famine.

Not a good outcome.

So, what we’d really like is some method of bringing those future high prices back in time to now. For if food prices are high now, or if some food prices, those that will be in short supply in the future, are high now, then people will now eat less of them. They will substitute. Eat potatoes instead of bread, polenta not pasta, cassava not mealie meal. Perhaps even waste less food.

This is good, it makes what we do have in the warehouses go further.

And high prices today will also get farmers thinking about planting more land next year. Even pondering on how to increase their yield this year. Maybe a little more fertiliser? More weeding? Take more care at harvest time, waste less?

So we also increase future supply by having higher prices now.

So, by bring future high prices into the present we actually stop that famine, reduce the price rises and manage to make the current supplies of food go further. All in all, a pretty good result.

And who is it that brings those prices through time?

Yup, it’s the speculators. So, speculators are a good thing because they reduce starvation by moving prices in time.

Hurrah for speculators!

BTW, all of this is laid out in Adam Smith’s Wealth of Nations, Book IV, Chapter 5, start at paragraph 40.

It’s only been in print for the last 235 years. Isn’t it time that people managed to grasp the point?

Hello Mr Worstall,

I’m afraid I will have to diagree with you about the riots. Yes they were triggered by a reduction on subsidy. But the payload was the rise in prices. Food prices were and are going up and only part of it is due to natiral shortages.

“The FAO noted September 1 that the world food price index had risen by 5 percent from July to August, reaching its highest level in two years.. ” That was last year.

I also refer you to the Times article quoting Robert Zeigler. It’s not me saying there were dramartic increases in food prices. Its all the agencies which monitor the stuff.

As for your point that price rises don’t require speculators, well of course you are quite right. It turns out though, that the speculators have been willing to lend a hand anyway.

In fact they’ve been delighted to help since, by happy coincidence, it is when natural forces are going to create a shortage and prices will necessarily go up, that this is just when the speculators can have their greatest effect. The speculators are just the right men for taking this natural fluctuation and by adding their helping billions to it, they can turn a not very profitable shortage into a hugely profitable one.

You only have to look at the dynamic and amplitude of the up and down in prices to see the speculators helping hand.

Who, as you say, no doubt feel they are in fact doing god’s work in helping us all learn lessons in starvation and poverty early.

Flippancy aside, I agree with the lunacy of bio fuels and unsustainability of present food consumption patterns.

But as for telling me that specualtion always nets out to zero and no ramp can be achieved with futures – that’s in the same file as ‘you can’t sell securities that are in fact “sacks of shit” ‘. Oh yes you can. JP Moragn did.

“As for your point that price rises don’t require speculators, well of course you are quite right. It turns out though, that the speculators have been willing to lend a hand anyway.”

Rather my major point. That we want them to do this. We would rather have a smaller price rise now than a large price rise later.

“The speculators are just the right men for taking this natural fluctuation and by adding their helping billions to it, they can turn a not very profitable shortage into a hugely profitable one.”

No, by speculating they turn what would be a bad famine into a mere shortage.

“You only have to look at the dynamic and amplitude of the up and down in prices to see the speculators helping hand.”

No, speculation reduces price volatility.

“Who, as you say, no doubt feel they are in fact doing god’s work in helping us all learn lessons in starvation and poverty early.”

No, they’re motivated purely by profit. It’s the effect which is a good thing, not the motive. Short rations now on high prices now instead of starvation on higher prices in the future.

“But as for telling me that specualtion always nets out to zero”

I didn’t say that speculation always nets out to zero. I said that derivatives do. And they must, by definition, do so. For everyone who buys a future or option going long someone must have sold them that future or option taking the opposite short position. Buyers and sellers of derivatives must, in aggregate, make no profit at all.

But let me put the whole thing in a different manner.

We’ve got a food shortage looming (biofuels, weather, bad harvests, locust, whatever). What’s your alternative to the actions on prices that speculators have?

What about the study of Walton and Seddon (1994), which found that between 1976 and 1992 there were 146 food riots in 39 different countries where Structural Adjustment Plans from the IMF had forced neoliberal policies upon less developed countries?

“What about the study of Walton and Seddon (1994), which found that between 1976 and 1992 there were 146 food riots in 39 different countries where Structural Adjustment Plans from the IMF had forced neoliberal policies upon less developed countries?”

1. Official IMF policies are rarely optimal in terms of introducing secure and well-regulated free markets. Multi-nationals of all sorts are to be treated with scepticism.

2. How many food riots happened in countries that did not follow IMF policies?

I love the way you rather imperiously state as if it were a known certainty of the universe that “Speculation reduces volatility”.

Just because that’s what it says in the standard textbooks of linear, equilibrium economics doesn’t make it true. Economics is full of assumptions most of which are based on an equilibrium and linear view of how the world works. That everything is ruled by a bell curve, change tends ot be linear and everything regresses to the mean.

Trouble is the real world is not governed by any of those notions. In short tewct book economics is an in=mpressively rigarous internally consistent structure based on a set of assumptoins which have, as you put it earlier, sweet FA to do with the actual world.

Mathematicians, physicists, and biologists leaned this a few decades ago. Economists have not learned nothing.

“Just because that’s what it says in the standard textbooks of linear, equilibrium economics doesn’t make it true.”

Excellent, so now that you know better than the settled and established opinion in one of the scineces you are now going to reveal your groundbreaking evidence to the contrary, are you?

You know, perhaps that wonderful argument by the Word Development Movement? Theone where they note that rice does not have a deep and liquid speculative market yet wheat and corn do, which is why in 2006/7 the rice price was more volatile than that of wheat and corn?

OMG, when will this myth of speculators driving up commodity prices ever die? Yes, speculation can drive up prices when they hold the physical off the market. However, such an assertion requires evidence that speculators are in fact hoarding. Just evidence that speculators are buying lots of long futures and by definition someone else is selling short futures is evidence only of lots of paper contracts being exchanged.

Commodity and futures markets have delivered stable prices for those in the emerging and developing world and it is depressing that the likes of the OP does not recognise that. Yes, lots of wealthy traders and financial institutions are betting on price rises. However, they do not cause the price rises, they are responding to the fundamentals that anyone can see. Bad harvests, other supply problems, demand in the emerging world and inflation in the emerging world. Traders not being idiots can look at the fundamentals and put 2+2 together. Traders go long the market and ergo price rises. Must be speculators causing the price rises, right? No, they anticipated them. Fundamentals caused the price rises.

Lefty economist Paul Krugman a few weeks ago.
http://ww2.postbulletin.com/newsmanager/templates/localnews_story.asp?z=12&a=483775

There is no business like show business in Davos.
This should be the motto for that “World Economic Show.”
Imagine that even the Russien president flew there after a terrorist attack (the Soviets are long gone!), and that… Robert De Niro was invited this year!

For those, in Davos, Cairo or elsewhere who have short memories.
In November 2008, the founder of Davos economic forum figured out the cost of the global financial crisis at about $5,000 billion. He added that this astronomical amount should be (quote) “replaced” by… the governments! (cited in my book “The Seven Deadly Sins of Capitalism”. Excerpts on http://www.mikeconomics.net).
Now “the year of ‘mea culpa’ is apparently over,” as David Malone. writes. And the governments are “advised” by the same who caused the crisis and took the money and ran to put public finances in order, cut deficits; and so on…

What have (most) financiers (and politicians) learned from the crisis?
The answer is nothing.
So let’s wait for the next crisis, to be followed by another Davos forum full of crocodile tears (and perhaps Robert Redford among the guests then).

Morning Tim,

Two things for you.

First, economics isn’t and never has been a science. That youi apparently think it is, epxlains why we are both fluent but sadly in different languages.

economics is a secular theology and has nothing scientific about it. Just becuase people dress up their mumbo jumbo with equationsdoesn’t make it scientific. It makes it modern numerology. you can polich a turd all yo like it will never be anything better than it is at core.

Second, it’s not me knowing better than economic text books its modern mathematics, physics and biology. You want evidence – fine. I suggest you start with any decent intro to non-linear dynamics.

There are many. A few I can see on the shelf are:
Ivar Ekeland – Mathematics and the unexpected
David Ruelle – Chance and Chaos
John D. Barrow – Impossibility
A.K.Dewdney – Beyond Reason Chapter 4

If you want a good critique of some of ther patented blather of economics try

Paul Ormerod – The Death of Economics (He’s an economist by the way)

For biology try any of Robert May’s early papers.

If you like pictures and geometry try teh old standard Chaos by James Gleik

If you want a film try my film High Anxieties – The Mathematics of Chaos. You can find it on youtube or The debt generation web site.

sooner or later Economics is going to have to wake up and admit that the non-linear nature of real world systems makes the linear and equilibrium assumptions of economics laughable.

RichardW,

Quote me some more received wisdom why don’t you. I know how it is supposed to work. But things like bid stuffing happen you know.

You know as well as I do that futures have an impacrt on what governments and agencies and whole salers will actually pay.

I was just chatting to a banker friend of mine and he nearly choked when I told him your comment.

“economics is a secular theology and has nothing scientific about it. ”

Eh? People don’t respond to incentives? There are free lunches? Opportunity costs are not important? There is no time value to money? Human beings aren’t subject to hyperbolic discounting? Comparative advantage is simply nonsense? Wealth is not created by the division and specialisation of labour and the resultant trade in produced goods and services? Inflation is not a monetary phenomenon? There is no income or substitution effect from changes in taxation?

Seriously? These propositions are all equivalent to arguing over whether the Sky Fairy provides you with an eternal choir to sing in or 72 raisins if you’ve lived the Good Life?

“sooner or later Economics is going to have to wake up and admit that the non-linear nature of real world systems makes the linear and equilibrium assumptions of economics laughable.”

That the economy as a whole is non-linear and chaotic is well known. Indeed, I’m rather firmer on it myself than most economists (please note, once again for the record, that I am not an economist). Which is why I tend to pooh pooh much macroeconomics and its mathematics and prefer to look at microeconomics, an area where we are all on much firmer ground.

But to our main question here: does speculation increase or reduce volatility? We’ve had a number of empirical studies, from onion futures to the different reactionsof rice, wheat and corn prices in 2006/8.

Volatility is reduced by speculation, not increased. Heck, we even have the theoretical mechanism by which this all works: Galton’s Ox.

I’m even willing to grant you that those parts of economics which deal with chaotic and nonlinear systems, using tools best suited to linear and non chaotic systems, aren’t all they could be. But that doesn’t mean that those parts of economics which do not assume equilibrium etc a religion, does it?

This article is a bit simplistic. I don’t see the cogent link between the vile excesses of our plundering banking caste and the rise in the cost of food. I think the price of food increasing has more to do with the simple economic pressures of supply and demand than some banking conspiracy. Though I don’t completely discount your thesis. These people are certainly not above such chicanery.

I think you miss the larger point.

The issue isn’t bailouts or parties in Davos, the issue is whether banking in it’s current form should be allowed to continue at all. People talk about “casino banking” and the mistakes made that led to the last economic crisis but no one points out that they should never have been allowed to perpetrate such a vast financial fraud in the first place.

Bankers in their current incarnation essentially function to redistribute wealth. They redistribute wealth from the economy at large to themselves. They produce nothing tangible so by definition they exist to plunder the global economy. They have perpetrated the largest financial fraud in history and continue to do so. This fraud is that somehow they have created the notion that they are an essential part of our economy when in fact they are simply blood sucking parasites.

Forget taxing them more, let’s put them all in prison.

They produce nothing tangible so by definition they exist to plunder the global economy.

gosh, that’s interesting.

tan·gi·ble (tnj-bl)
adj.
1.
a. Discernible by the touch; palpable: a tangible roughness of the skin.
b. Possible to touch.
c. Possible to be treated as fact; real or concrete: tangible evidence.
2. Possible to understand or realize: the tangible benefits of the plan.
3. Law That can be valued monetarily: tangible property.
n.
1. Something palpable or concrete.
2. tangibles Material assets.

You can’t touch good health so all doctorsr are parasites? You can’t touch whatever it is that tax collectors do so let’s put them all in prison?

You can’t in fact touch any of the things which are produced by those working in services. Services being 87% of our economy so let’s put 87% of the workforce in prison?

“You can’t touch good health so all doctorsr are parasites? You can’t touch whatever it is that tax collectors do so let’s put them all in prison?”

Straw man.

You answered your own poorly thought out question that no one asked. Doctors provide a service. City bankers do not.

If they do can you please tell me what it is?

18 – allocating capital and risk.

@ 18: not my fault you don’t know what tangible means.

And what @19 said.

“We’ve got a food shortage looming (biofuels, weather, bad harvests, locust, whatever).”

Cough…Amyarta Sen – famines are rarely, if ever, caused by food shortages. They are caused by inequalities built into mechanisms for distributing food. From wikkipedia’s summary: “In Poverty and Famines, Sen revealed that in many cases of famine, food supplies were not significantly reduced”

“allocating capital and risk.”

OK, good answer. Thank God we have these greedy scumbags gorging themselves senseless at an endless trough filled by hard working ordinary people, I sleep much better at night knowing that these villians have allocated all that capital and risk, whatever that means.

“Sen revealed that in many cases of famine, food supplies were not significantly reduced””

Indeed. But he’s talking about 20 th century ones. When there are transport networks, futures markets and the free flow of information about the food shortages in certain areas.

He doesn’t doubt at all that famines before those were in place were caused by actual lack of food.

unlike Richard, Tim and Paul Krugman, I wouldn’t bet my house on speculation being unable to move prices unless physical hoarding is involved. That may well just show I don’t understand things.

However, I would bet my house on the assertion that speculation can and has reduced price volatility, and Mr Malone if you don’t know that, then it’s you who hasn’t bothered to look at evidence. I’d also bet my house that simply blaming recent price increases on “speculators” is a very poor explanation of what’s really driving prices.

[ and what is all this crap about economic being all about "linear dynamics" and equilibrium? Yes economists to tend to think about economies as systems that would tend to move towards a fixed point (or growth path) if left undisturbed, but that doesn't mean they think economies are ever in equilibrium. There are good reasons for that, and having your economy wander around a 'strange attractor' or whatever isn't as different as you might think. And I just don't know where the "linear" thing comes from, there's non-linear dynamics all over the shop. Why is it that all these people who confidently asset economics is rubbish don't know the first thing about it?]

David,

A couple of points I would make. I did not give the Krugman link as an appeal to authority. He is a widely read economist who is well known as moderately left wing. Since this is a lefty blog and he has no financial industry bias quoting him here seems reasonable to me.

Since it is so easy to make money and predict the future path of commodity prices. You and your banker friend should open long positions and clean up. In fact, if everyone goes long everyone will make money, right? Any idea of potential problems with this strategy?

I agree with you that economics is not a science. Moreover, i share your skepticism about some models and their real world applications. However, one can’t just dismiss economics because some of the models have unrealistic assumptions. Models and theories are not saying everyone always behaves in a certain way. They are merely an approximate explanation of how things work in the economy. It is the assumptions behind a model that should be questioned.

The place we find ourselves in if we just dismiss what we already know about economics is we have people just making stuff up. Since one persons made up stuff is as good as another persons made up stuff we find ourselves back in the age of ignorance. Politics also is not a hard science so when people make political assertions we ask them for evidence and data to back up their political assertions. The same data and evidence test applies to those who want to challenge generally accepted economic principles, theories and models.

And on the subject of Cairo, the Labour Party are affiliated to Mubarak’s National Democratic Party – you couldn’t make it up.