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.

Adam Smith, writing 232 years earlier:

The popular fear of engrossing and forestalling [Smith's terms for commodity speculation] may be compared to the popular terrors and suspicions of witchcraft. The unfortunate wretches accused of this latter crime were not more innocent of the misfortunes imputed to them, than those who have been accused of the former. The law which put an end to all prosecutions against witchcraft, which put it out of any man’s power to gratify his own malice by accusing his neighbour of that imaginary crime, seems effectually to have put an end to those fears and suspicions, by taking away the great cause which encouraged and supported them.

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Oh the irony...

... coming from someone who could make a few dozen millions in oil markets, merely by giving a press conference.

Engrossing and forestalling

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 were prevented from selling their produce to middle-men (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?

Perhaps im stating the

Perhaps im stating the obvious, but let me add to that:

Even if the speculator increases the price of oil in the short run, if he does well (makes a profit) he will have lowered it somewhere in the future. This stabilization effect by itself is more than enough to be happy about speculation rather than seeing it as something that needs to be stamped out.

Personally, i consider the fact that it is a voluntary activity a sufficient argument.