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Futures markets improve the affordability of the resource by its actual consumers by stabilizing its price. Unpredictable prices, even if they end up being low,

Futures markets improve the affordability of the resource by its actual consumers by stabilizing its price. Unpredictable prices, even if they end up being low, hurt consumers by requiring consumers to keep cash in reserve just in case the (remember, unpredictable) price swings wildly. That cash in reserve is cash that cannot be spent elsewhere, be it necessities like food or luxuries produced elsewhere in the economy.

amelius 6y ago
Has this been found empirically or is this just a theory, just like how the free market without government intervention always is supposed to give the most favorable outcome?
- goodcanadian 6y ago
  I think this highlights an oft-missed point. There is no such thing as a free market without government intervention. Left to their own devices, traders will always try to game the market to their own advantage.
  - eru 6y ago
    Your comment is somewhat of a non sequitur. First, if you look hard enough, you can see traces of the hand of government in almost anything on earth, including any market. In practice, government meddling is a matter of degree and kind. The dose makes the poison. There are some markets that are free enough of interference that we can fruitfully analyze them as 'free' markets. Second, what do you mean by 'try to game the market'? In general, markets are sustainable in the long run without government interference (and usually actually more stable this way). Interactions in markets often behave like the famous Prisoner's Dilemma. So, yes, for a single interaction it's profitable to cheat the other guy, but repeated interactions tend very strongly towards cooperation.
    - goodcanadian 6y ago
      Free markets only work when there are large numbers of sellers and buyers. One example (out of many) of a necessary government intervention is to prevent monopolies from forming (or at least regulate them). Whenever one party has an outsized influence, they will tilt the whole market in their favour. It doesn't even have to be a monopoly, if a single player makes up a substantial portion of the market, they can affect it in non-free ways. Even Adam Smith recognised the need for government regulation to ensure that markets remain free. Edit: I think you may have misread my comment; I wasn't claiming that there is no such thing as a market without government interference (though that is probably mostly true). I was claiming that a market cannot be free without government regulating it to keep it free.
      - eru 6y ago
        I am challenging that assumption that markets are so easily monopolized. Markets are more robust than you give them credit for. One argument is that rather often governments themselves are trying to monopolize markets with all their regulatory might, but grey and black markets usually spring up rather quickly. Trying to monopolize a market as a private participant (even a big one) without the government on your side is even harder. I do agree that monopolies are an important consideration when designing regulation. But mostly in the sense that your regulation has to be careful to avoid supporting monopolies. Especially barriers to entry are often overlooked. For example, regardless of content, complexity of regulation itself can be a barrier to entry. Compliance takes a lot of lawyers and accountants. (Eg most agricultural subsidies around the world go to really big farms. And financial regulation's complexity essentially forces banks to become big.) If regulators were really interested in combatting monopolies, there are a few straightforward strategies to try first: * Encourage foreign competitors to enter domestic markets * Encourage companies from different industries to branch out (eg Walmart tried to offer banking services a while ago. Lobbying by banks kept that competition at bay.) * Encourage start-ups. (This is much harder for governments than the first two points. One way to encourage start-ups is via simplifying regulations. But there are lots of other popular ways that don't work well. See eg all the government funding available for tech startups in Europe that sadly doesn't seem to produce much by and large; but it feels good to hand out money.)
  - timeeater 6y ago
    Wouldn't traders create their own rules for trading? (As presumably they have also done in the past)? I think most financial constructs were created by traders, not governments. Financial constructs are basically standard contracts.
    - triangleman 6y ago
      Indeed the first securities were sold via auction under a buttonwood tree, and I don't think any government agents were on hand to facilitate it, but I could be wrong.
  - lodi 6y ago
    > There is no such thing as a free market without government intervention. Maybe this is true with respect to global financial markets, etc. But it can't possibly be true in general. People have stably traded physical goods in literal markets (i.e. stalls where you buy spices and tomatoes and such) for thousands of years with no government intervention.
    - Hokusai 6y ago
      > with no government intervention. Small amounts of people do not need a government because they can just represent themselves. Any city needs a government, tasting at any sensible scale needs a the government. 3000BC Egyptians had taxes, laws and a government. Can you provide some historical example of thousands of citizens trading without a government? That would be an incredible experiment on anarchism.
    - tshaddox 6y ago
      I bet lots of those markets have been robbed, both by governments and other people.
- tobessebot 6y ago
  https://www.sciencedirect.com/science/article/abs/pii/S0378437108001052 https://www.sciencedirect.com/science/article/abs/pii/S03784... https://www.tandfonline.com/doi/abs/10.1080/09603100110088085 https://www.tandfonline.com/doi/abs/10.1080/0960310011008808... Futures markets do increase spot market efficiency.
  - batterseapower 6y ago
    These are financial futures. For some evidence that the presence of futures stabilises spot commodity prices see e.g. http://qed.econ.queensu.ca/CNEH/2005/papers/futures_CNEH_0305.pdf http://qed.econ.queensu.ca/CNEH/2005/papers/futures_CNEH_030...
    - tobessebot 6y ago
      Thanks for the addition!
- aliceryhl 6y ago
  The effect is real, and more comparable to insurance than the free market thing you mention. If you are a water supplier and you sell your water through futures with e.g. a 6 month duration, then you know for certain that you will be able to sell your water for that price for the next six months, and if the price of water drops substantially, you have six months to figure out how to pay your employees, because it wont hit you until six months later. Of course, if the price increases, then you don't get the profit that this would have otherwise produced. That's the price of the insurance against low prices.
- algorias 6y ago
  > like how the free market without government intervention always is supposed to give the most favorable outcome? Nobody actually claims that, specially not economists. In fact, economics study exactly how and when markets don't produce the most favorable outcome.
- forest_dweller 6y ago
  The idea of the future markets was because of the fluctuating rice supply in Japan during the 17th century. https://www.investopedia.com/terms/d/dojima-rice-exchange.asp https://www.investopedia.com/terms/d/dojima-rice-exchange.as...
- chordalkeyboard 6y ago
  Its the reason people created futures markets. Producers want price stability to hedge in the event of a crash so they can pay their workers in 6 months. Purchasers want price stability in the event of a shortage so they can still purchase inputs and keep their business running in 6 months. People who have information related to future price swings can make a profit by purchasing futures contracts. Producers and purchasers then learn about this when the price of the contract changes.
- texasbigdata 6y ago
  You’re a farmer. You sell 3 crops. You can lock in futures to reduce your outcome variability. There are multiple benefits.
- imtringued 6y ago
  A lot of markets break the perfect market assumption. For example, monopolies shouldn't exist in theory but they do in reality. In theory a competitor can always jump in and destroy the monopoly. Commodity markets are much closer to perfect markets than anything else.
- solatic 6y ago
  Everybody who has an explicit "rainy-day" fund set aside is somebody who is paying a price to try and prepare for instability / insecurity. The collective sum of all those funds in the US is probably in the billions, if not more. Futures contracts provide a more explicit way, with a stronger guarantee, of paying the price for security for specific assets / resources rather than hand-wavy guesses of how much money should be put aside for the Black Swan case. Sure, there are plenty of poor people who are so poor that they don't have any savings at all. But surely you don't think that rainy-day funds are just a theory?

amelius 6y ago

Has this been found empirically or is this just a theory, just like how the free market without government intervention always is supposed to give the most favorable outcome?

goodcanadian 6y ago
I think this highlights an oft-missed point. There is no such thing as a free market without government intervention. Left to their own devices, traders will always try to game the market to their own advantage.
- eru 6y ago
  Your comment is somewhat of a non sequitur. First, if you look hard enough, you can see traces of the hand of government in almost anything on earth, including any market. In practice, government meddling is a matter of degree and kind. The dose makes the poison. There are some markets that are free enough of interference that we can fruitfully analyze them as 'free' markets. Second, what do you mean by 'try to game the market'? In general, markets are sustainable in the long run without government interference (and usually actually more stable this way). Interactions in markets often behave like the famous Prisoner's Dilemma. So, yes, for a single interaction it's profitable to cheat the other guy, but repeated interactions tend very strongly towards cooperation.
  - goodcanadian 6y ago
    Free markets only work when there are large numbers of sellers and buyers. One example (out of many) of a necessary government intervention is to prevent monopolies from forming (or at least regulate them). Whenever one party has an outsized influence, they will tilt the whole market in their favour. It doesn't even have to be a monopoly, if a single player makes up a substantial portion of the market, they can affect it in non-free ways. Even Adam Smith recognised the need for government regulation to ensure that markets remain free. Edit: I think you may have misread my comment; I wasn't claiming that there is no such thing as a market without government interference (though that is probably mostly true). I was claiming that a market cannot be free without government regulating it to keep it free.
    - eru 6y ago
      I am challenging that assumption that markets are so easily monopolized. Markets are more robust than you give them credit for. One argument is that rather often governments themselves are trying to monopolize markets with all their regulatory might, but grey and black markets usually spring up rather quickly. Trying to monopolize a market as a private participant (even a big one) without the government on your side is even harder. I do agree that monopolies are an important consideration when designing regulation. But mostly in the sense that your regulation has to be careful to avoid supporting monopolies. Especially barriers to entry are often overlooked. For example, regardless of content, complexity of regulation itself can be a barrier to entry. Compliance takes a lot of lawyers and accountants. (Eg most agricultural subsidies around the world go to really big farms. And financial regulation's complexity essentially forces banks to become big.) If regulators were really interested in combatting monopolies, there are a few straightforward strategies to try first: * Encourage foreign competitors to enter domestic markets * Encourage companies from different industries to branch out (eg Walmart tried to offer banking services a while ago. Lobbying by banks kept that competition at bay.) * Encourage start-ups. (This is much harder for governments than the first two points. One way to encourage start-ups is via simplifying regulations. But there are lots of other popular ways that don't work well. See eg all the government funding available for tech startups in Europe that sadly doesn't seem to produce much by and large; but it feels good to hand out money.)
- timeeater 6y ago
  Wouldn't traders create their own rules for trading? (As presumably they have also done in the past)? I think most financial constructs were created by traders, not governments. Financial constructs are basically standard contracts.
  - triangleman 6y ago
    Indeed the first securities were sold via auction under a buttonwood tree, and I don't think any government agents were on hand to facilitate it, but I could be wrong.
- lodi 6y ago
  > There is no such thing as a free market without government intervention. Maybe this is true with respect to global financial markets, etc. But it can't possibly be true in general. People have stably traded physical goods in literal markets (i.e. stalls where you buy spices and tomatoes and such) for thousands of years with no government intervention.
  - Hokusai 6y ago
    > with no government intervention. Small amounts of people do not need a government because they can just represent themselves. Any city needs a government, tasting at any sensible scale needs a the government. 3000BC Egyptians had taxes, laws and a government. Can you provide some historical example of thousands of citizens trading without a government? That would be an incredible experiment on anarchism.
  - tshaddox 6y ago
    I bet lots of those markets have been robbed, both by governments and other people.
tobessebot 6y ago
https://www.sciencedirect.com/science/article/abs/pii/S0378437108001052 https://www.sciencedirect.com/science/article/abs/pii/S03784... https://www.tandfonline.com/doi/abs/10.1080/09603100110088085 https://www.tandfonline.com/doi/abs/10.1080/0960310011008808... Futures markets do increase spot market efficiency.
- batterseapower 6y ago
  These are financial futures. For some evidence that the presence of futures stabilises spot commodity prices see e.g. http://qed.econ.queensu.ca/CNEH/2005/papers/futures_CNEH_0305.pdf http://qed.econ.queensu.ca/CNEH/2005/papers/futures_CNEH_030...
  - tobessebot 6y ago
    Thanks for the addition!
aliceryhl 6y ago
The effect is real, and more comparable to insurance than the free market thing you mention. If you are a water supplier and you sell your water through futures with e.g. a 6 month duration, then you know for certain that you will be able to sell your water for that price for the next six months, and if the price of water drops substantially, you have six months to figure out how to pay your employees, because it wont hit you until six months later. Of course, if the price increases, then you don't get the profit that this would have otherwise produced. That's the price of the insurance against low prices.
algorias 6y ago
> like how the free market without government intervention always is supposed to give the most favorable outcome? Nobody actually claims that, specially not economists. In fact, economics study exactly how and when markets don't produce the most favorable outcome.
forest_dweller 6y ago
The idea of the future markets was because of the fluctuating rice supply in Japan during the 17th century. https://www.investopedia.com/terms/d/dojima-rice-exchange.asp https://www.investopedia.com/terms/d/dojima-rice-exchange.as...
chordalkeyboard 6y ago
Its the reason people created futures markets. Producers want price stability to hedge in the event of a crash so they can pay their workers in 6 months. Purchasers want price stability in the event of a shortage so they can still purchase inputs and keep their business running in 6 months. People who have information related to future price swings can make a profit by purchasing futures contracts. Producers and purchasers then learn about this when the price of the contract changes.
texasbigdata 6y ago
You’re a farmer. You sell 3 crops. You can lock in futures to reduce your outcome variability. There are multiple benefits.
imtringued 6y ago
A lot of markets break the perfect market assumption. For example, monopolies shouldn't exist in theory but they do in reality. In theory a competitor can always jump in and destroy the monopoly. Commodity markets are much closer to perfect markets than anything else.
solatic 6y ago
Everybody who has an explicit "rainy-day" fund set aside is somebody who is paying a price to try and prepare for instability / insecurity. The collective sum of all those funds in the US is probably in the billions, if not more. Futures contracts provide a more explicit way, with a stronger guarantee, of paying the price for security for specific assets / resources rather than hand-wavy guesses of how much money should be put aside for the Black Swan case. Sure, there are plenty of poor people who are so poor that they don't have any savings at all. But surely you don't think that rainy-day funds are just a theory?