If you think speculation is bad, wait until you see the effects of no speculation

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if-you-think-speculation-is-bad-wait-until-you-see-the-effects-of-no-speculation

It's been a commonplace for months now, that rises in food prices, the bouncing around of oil, the general manner in which commodity markets are volatile, is all being driven by speculation.

You know, this idea that if people are playing with money to make a profit then they must be doing something wrong?

The current bugbear is that such speculation makes prices more volatile. As volatile food prices are certainly not a good thing for the poor, who spend so much of their incomes on food, thus speculation in such things, which causes volatility, is wrong and must be banned.

The only real problem with this line of thought is that there's no evidence at all that the speculation leads to the volatility. Indeed, in theory, speculation should lead to reduced volatility, as Adam Smith points out (start at para 40). Theory's all very well of course, but how does this work out in practice?

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Yes, that's right, onions, where speculation through futures and options has been banned this past 50 years, are vastly more volatile in price than oil is, where everyone and their grandmother can speculate to their hearts' content.

If you think speculation causes price volatility, just have a look at what happens to price volatility when speculation is banned.