The anger of the mob, the righteous idignation of the ignorant, is being stirred up again. You can hardly open a copy of the Guardian or Independent but someone is lecturing you on the evil of speculation in foodstuffs. How dare these people trade in futures, commodities, when there are hungry people in the world? Surely there are some things which it is too important to have markets in?

Well, as Mr. Venning always said, the correct answer to any question which begins "Surely" is "No". And the reason for the no in this case is that speculation in foodstuffs stops people from starving.

Adam Smith, of course, explained it at great length (of course) here in Wealth of Nations. What the speculator is doing is moving prices around in time. If there is to be a shortage in the future (say, the crop has failed) then by buying up now to sell at a profit in the future that speculator has brought forward the price rise. Thus people moderate their demand now and the future shortage is smaller. It is, after all, easier to eat a little less for 12 months until the next harvest than it is to eat regularly for 9 months and then nothing at all for three. Well, perhaps not easier but definitely more likely to lead to your actually being alive at the next harvest.

A possible retort to this is that, well, it never actually happens like that, does it? In the absence of speculation, when there are, say, price controls to forbid it, the food doesn't run out, does it?

Yes, actually, it does:

A classic example of price controls making a bad situation much worse occured in 1584-85, when Spanish forces under the Duke of Parma besieged the port city of Antwerp on land and gradually blockaded it from the sea as well. As food became scarce, the city fathers imposed price controls. While food was plentiful elsewhere, and merchants could have delivered vast quantities of supplies before the Spanish tightened their blockade, relief never came. The reason:

Antwerp's price controls meant that merchants would get only the same price for their goods in Antwerp as they would get for selling them elsewhere at a much lower cost and risk. Naturally, the merchants sold elsewhere. At the same time, the artificially low prices set by the city government discouraged the citizens from limiting their consumption of scarce foodstuffs. The result: The population continued to eat heartily as if there was no shortage until the food ran out and they were forced to surrender. In the words of one historian, "the city, by its own stupidity, blockaded itself, far more effectively than the Duke of Parma could have done." Schuettinger and Butler, op. cit., pp. 33.

It's true that the Spanish no longer besiege Antwerp (it's more likely to the the Dutch besieging some Spanish beach these days) but the principles are exactly the same. If there is to be a shortage in the future then we want prices to rise now: to both increase supply and reduce demand now, so that the looming shortage is diminished. That's exactly the service that speculators perform for us and exactly why we want to have them in our food supply chain.

For there really are things which are much too important for us not to have markets in them.