Adam Smith Institute

Keith Boyfield, a senior fellow at the ASI and chairman of our regulatory evaluation group, has written a piece for our new 'Regulatory Monitor' section, on the Competition Commission's report on BAA. You can read it here.

With politicians facing huge voter flack for rising oil prices, they're looking around for someone to blame. With free trips to the Olympics coming up they have to be nice to the Chinese, so the scapegoats of the moment are the speculators.

Folk like Italy’s finance minister Guilio Tremonti (who calls speculators the ‘plague of the 21st Century’) wants action against them, invoking Article 81 of the European Treaty, outlawing ‘anti-competitive agreements’. EU President Nicolas Sarkozy seems to be supporting the move. And Article 81 rulings can be made by majority vote, which is bad news for the UK, with its enormous financial services sector. Meanwhile Germany's Social Democrats want curbs on asset-stripping 'locusts' like private equity and hedge funds. A 'Stop Excessive Energy Speculation Act' has been introduced in the Senate.

Commodities futures are complex, which makes them an easy target for politicians. But these attacks are grounded in complete ignorance of what speculators do.

Yes, speculators take a bet on future prices. But to survive, they have to be highly informed about the supply and demand conditions they bet on. They don’t bet on rising prices unless they think that (real) demand is going to outstrip (real) supply. They certainly can't afford to bet on rising prices just because other people do. As home-owners have found to their cost, you can bet on rising house prices and make a lot of money, but if you don't understand where the market is going and get out in time, you can lose a lot of money too.

The bets – the forward contracts – that speculators offer are therefore a really good, informed indicator of where supply and demand, and therefore prices, are actually heading. That enables suppliers to adjust their production to match the real needs that end users will probably have in the future. Waste and shortages are avoided. It also reduces the volatility of markets, because suppliers can agree future prices now, and produce to that price with confidence. (If you want to know more about how speculation benefits markets, see my new book The Best Book on the Market.)

The reason that oil is going up is because China and others are using more of it but production is pretty well static. That's not going to change because a bunch of EU politicians outlaw speculation. Let's hope is doesn't take an EU ruling that kills off London's financial sector before people find that out.
 

The New York Times recently ran a delightfully informative Q&A blog about food and farm subsidies with Freakonomics author Stephen Dubner asking agricultural economist Daniel Sumner the hard hitting questions.  He's blunt but polite and eminently reasonable.  Here are some particularly charming segments:   

On bad rationalizations:
Q: I have heard that the reasoning behind farm subsidies is to keep farmers farming when market prices are low, so in the event of a demand shift the capacity would be there to meet the need. Do you think this supposed benefit outweighs the negative effects of market interference?

A: This rationale, or rationalization, for farm subsidies makes no sense.

I'm not sure whether to be more disturbed that an American asked this question, or happy about Dubner's answer:

Q: What are your thoughts on passing a mandate for gardens in the United States?...

A: Do you really think “we” were ever willing to accept the backyard inspectors that would come around and check that I planted the government approved crops? Hard to picture John Adams or Ben Franklin happy about opening up their homes to the Crown or the Feds.

And the most succinct, dead-on answer of all:

Q: Are there any good arguments that support farm subsidies? If so, to what extent and in what manner may they be justified?

A: No.

It's nice to see someone telling it like it is to a pretty wide audience.  In any case, check out the article; there's much more, and Sumner explains the intricacies of just how stupid farm subsidies are much more eloquently than I could.