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> But that practically means they are based on speculation about possible future supply and demand, and we are more or less taking it on faith that that specula

> But that practically means they are based on speculation about possible future supply and demand, and we are more or less taking it on faith that that speculation is correlated to actual supply and demand. This statement almost seems tautological. Of course prices are based on speculation about possible supply and demand, nobody has a crystal ball that can tell them “actual” supply and demand. In a competitive and liquid market, you expect prices to rapidly approach “optimal”, because otherwise there’s an opportunity there for someone make money out of the market inefficiency, buy correctly predicting when supply is high, and buying, then selling when supply is low. Which is exactly what future etc do, except without the need to actually move the physical commodity around.

tsimionescu 4y ago
> Of course prices are based on speculation about possible supply and demand, nobody has a crystal ball that can tell them “actual” supply and demand. Exactly, no one has such a crystal ball. And this actually generally applies not just to future supply and demand, but even to the past: it's actually impossible to measure supply and demand across any significant industry, to check whether prices matched it or not. And yet, economists and economical theory enthusiasts talk about the "law of supply and demand" as if it's some scientific observation, and not just a simplistic model that seems intuitive. > In a competitive and liquid market, you expect prices to rapidly approach “optimal”, because otherwise there’s an opportunity there for someone make money out of the market inefficiency You might expect that if you believe in the law of supply and demand, but as we were discussing, that is not how prices are actually formed, and anyone betting based on observed supply and demand (to the extent that it is actually possible to observe them) will be beat in general by others who are betting based on current speculation, which is how prices are actually formed. For example, if you are betting that gain prices will increase in the winter because that's what you think they did every year, and ignore some prominent pundit predicting that they will decrease this year, you may well lose the bet if everyone else believes the pundit. And that will be true regardless of whether grain will be in low supply or not.
- signatoremo 4y ago
  > you may well lose the bet if everyone else believes the pundit Can you give a real life example of when a pundit giving a predict against the actual supply that had everyone buy-in? Says, oil price goes down even when demand is hot?
  - PinkRidingHood 4y ago
    An inverse example would be any bubble, for example the housing bubble that happened over a decade ago. Prediction of house prices going up eventually reached a point where house prices were going up, despite low "actual demand" (of course, if you count "demand for investment", then prices are absolutely a measure of that).
  - tsimionescu 4y ago
    The price of oil is a particularly bad example, since it is heavily controlled everywhere in the world, as is supply. The international price of oil is largely set by OPEC or the USA or a few other countries (depending on geographical region). Also, this type of pundit influence is common with the price of stocks. It also happened with the price of natural gas in Europe last year, when it increased based on lack of confidence in reserves that turned out to be misplaced, and never really recovered.
- PinkRidingHood 4y ago
  The pundit's claims are part of the speculation. If you speculated that the pundit's words would matter, you'd short or sell out grain, making the pundit's words matter. Supply and demand are only sometimes good measures of people actually using or producing these products (and when they fail bubbles occur), but are always good measures of the spending of both people actually using the product, and the investors buying it in wanting to sell it. In any case, as the investors buy the product they eventually have to sell it, meaning over the long run demand and supply are good measures of "actual" usage and production. You know this because there's never a bubble that doesn't collapse and return to equilibrium.
  - 4y ago

tsimionescu 4y ago

> Of course prices are based on speculation about possible supply and demand, nobody has a crystal ball that can tell them “actual” supply and demand. Exactly, no one has such a crystal ball. And this actually generally applies not just to future supply and demand, but even to the past: it's actually impossible to measure supply and demand across any significant industry, to check whether prices matched it or not. And yet, economists and economical theory enthusiasts talk about the "law of supply and demand" as if it's some scientific observation, and not just a simplistic model that seems intuitive. > In a competitive and liquid market, you expect prices to rapidly approach “optimal”, because otherwise there’s an opportunity there for someone make money out of the market inefficiency You might expect that if you believe in the law of supply and demand, but as we were discussing, that is not how prices are actually formed, and anyone betting based on observed supply and demand (to the extent that it is actually possible to observe them) will be beat in general by others who are betting based on current speculation, which is how prices are actually formed. For example, if you are betting that gain prices will increase in the winter because that's what you think they did every year, and ignore some prominent pundit predicting that they will decrease this year, you may well lose the bet if everyone else believes the pundit. And that will be true regardless of whether grain will be in low supply or not.

signatoremo 4y ago
> you may well lose the bet if everyone else believes the pundit Can you give a real life example of when a pundit giving a predict against the actual supply that had everyone buy-in? Says, oil price goes down even when demand is hot?
- PinkRidingHood 4y ago
  An inverse example would be any bubble, for example the housing bubble that happened over a decade ago. Prediction of house prices going up eventually reached a point where house prices were going up, despite low "actual demand" (of course, if you count "demand for investment", then prices are absolutely a measure of that).
- tsimionescu 4y ago
  The price of oil is a particularly bad example, since it is heavily controlled everywhere in the world, as is supply. The international price of oil is largely set by OPEC or the USA or a few other countries (depending on geographical region). Also, this type of pundit influence is common with the price of stocks. It also happened with the price of natural gas in Europe last year, when it increased based on lack of confidence in reserves that turned out to be misplaced, and never really recovered.
PinkRidingHood 4y ago
The pundit's claims are part of the speculation. If you speculated that the pundit's words would matter, you'd short or sell out grain, making the pundit's words matter. Supply and demand are only sometimes good measures of people actually using or producing these products (and when they fail bubbles occur), but are always good measures of the spending of both people actually using the product, and the investors buying it in wanting to sell it. In any case, as the investors buy the product they eventually have to sell it, meaning over the long run demand and supply are good measures of "actual" usage and production. You know this because there's never a bubble that doesn't collapse and return to equilibrium.
- 4y ago