Speculators are Good for Society

on Friday, January 28, 2011

Onions are the only commodity for which futures trading is prohibited by law. In 1958, onion farmers were convinced that speculators were responsible for the falling price of onions, and lobbied to ban traders from attempting to buy low and sell high. The law passed and still stands today.

Take a look at the variability in the price of onion as compared to oil (where speculating is legal). Oil's swings in price are much lower; the market is much more stable. The price of oil is less "swingy" and much less dependent on short-term variation in supply and demand. Onions, on the other hand, are subject to every small change. If there is poor weather, onion production falls, and prices soar. If onions have a good year, prices fall near zero. None of this is good for an onion farmer.

In this way, traders, who appear to be non-productive members of society, serve a real function for the betterment of mankind -- they risk their own money and time to smooth markets for people like us, who would prefer to be able to reasonably predict the price of the things we buy in order to make reasonable budgeting decisions.