On not understanding the point about speculation

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on-not-understanding-the-point-about-speculation

Tom Bower makes the most appalling hash of this piece in The Guardian.

Leadership and consensus could solve these problems, but competition between producers, oil companies, governments and traders is preventing anyone thinking beyond profits. "We're not here to help others," Hall once said.

Hall is an oil trader and Bower is blaming him for pushing up oil prices, something which might choke off economic recovery. Hall is also a peak oil man: he thinks we're about to face serious shortages of the stuff which is why he's speculating that the price will rise. And Bower castigates him for being so selfish as to chase oil prices higher in the pursuit of profit: entirely missing the public good of that speculation.

That public good being something that Adam Smith himself pointed out. Assume that Hall is right, that we're going to face shortages of oil in the future. We would therefore desire some manner of reducing our current usage of it, so as to save what little is left for the really important things. We would also like people to go and have a really, really good look to see if there's some more oil that we've not noticed: lurking down the back of the sofa along with the small change perhaps. What can we think of that might achieve these two aims? Ah, yes, that's it, higher prices now.

So, Hall, following his hunches, drives up prices now and then what happens? Well, if that peek behind the cushions doesn't turn up any more oil then we've extended the life of the oil fields because we're using less. We've also encouraged people to develop alternatives. Hall makes a fortune, we're more prepared for the oil running out and things are pretty good. Perhaps that grease in the antimacassars can indeed be used though, we're not short of oil and thus Hall loses all his money. Things are still good, for we've found we don't have to worry about oil.

But this is the point about speculators. If they're correct, if there really is a shortage looming (of anything) then they bring that price signifying shortage forward: thus making shortage less likely. So they make their money from providing us with the signals which mitigate the very problem they've identified. If they are wrong then they lose their money.

All of which leads to the conclusion that, far from decrying speculators in search of profit, we should be applauding them. Indeed, we should celebrate their making a profit for the public good that they have provided. It's the speculators who lose money we should deride and denigrate: for they were wrong.