This isn't false but it feels reductive. A financial instrument that allows one to bet on the corn harvest is obviously valuable to the corn farmer, as it allows them to use profits from good seasons to hedge against bad seasons. They're also valuable to people whose business is affected by the corn harvest - cereal manufacturers, say. The problem is that they can also be used by people with no exposure at all who simply want to bet on the corn harvest, and from the scale of the finance sector it seems like we are pouring a lot more of our resources and brainpower in to designing exotic new ways to bet on the corn harvest than we are on growing corn.
> as it allows them to use profits from good seasons to hedge against bad seasons
It allows corn farmers to grow wheat instead, because he is selling it right now and wheat is more profitable right now.
The main reason why it doesn't go astray and make people hungry is because people that isn't involved in any way can go, study the factors that make wheat more profitable to corn, do their predictions of what will be the case at the point of delivery, and if they predict correctly that the price is wrong they can go and adjust it making a lot of money on the process.
I'm not sure how this is related to my post so perhaps I was unclear. I'm not talking about individual corn farmers and the choices they make, I'm talking about how we as a society and an economy allocate our resources. I'm saying that derivative financial instruments have value, for the reasons I suggested and the others described by sibling commenters, but that the finance sector is larger than that value warrants.
I'm not sure why I'm being downvoted, as I didn't think this is all that controversial. Historically, finance was a much more boring and less lucrative field than it is now, and consequently much smaller. "I'm a super smart 18 year old and I want to get rich, so obviously I should go into banking" is a relatively recent phenomenon. I agree with everyone else here that the industry has value, so presumably its recent explosion in size has brought some additional value, but it's very hard to believe that value is large enough to offset the opportunity cost of a generation of ambitious geniuses not going in to science or industry or becoming entrepreneurs.
The buyers and sellers of a futures contract are both trying to offload risk onto someone else. The risk profiles of both sides don’t always offset exactly, so speculators are necessary for functioning commodity futures markets (and markets in general). Also, price discovery is much more efficient with more liquidity, which is what speculators provide, in addition to risk assumption.
Sure, I get this and agree, but price discovery and facilitating markets are subject to diminishing returns just like anything else, right? I don't think I would've been downvoted for saying something like, "It's a problem that it's more lucrative to speculate on existing housing than to build new housing, so we should make regulatory changes to address that" and this feels analogous to me.
Commodities are fungible by definition and used in the production of all sorts of things. More commodities are constantly being grown/mined/pumped and sold onto the market.
More housing is being built, but housing is not fungible, nor is it used as an input for manufacturing. I’m not sure what you’re trying to imply by saying if you were making a completely different argument about housing speculation being bad, the reaction would be different. Of course it would, it’s a totally separate argument from the one we are having about commodity futures.
I’m not sure why you care so much about financial speculation, it provides more accurate pricing and lowers transaction costs for the actual users of the futures contracts who take delivery of the commodity.
In my opinion, your arguments are coming from an emotional place. Try and examine futures markets from a place where you aren’t thinking about greedy rich Wall Street guys, the amount of money they make is irrelevant to futures markets being useful tools for producers and consumers of commodities.
> financial speculation ... provides more accurate pricing and lowers transaction costs for the actual users of the futures contracts who take delivery of the commodity.
I understand and agree, as I've said pretty explicitly in both of the comments you responded to. I'm arguing that the finance sector should ideally be smaller than it is, but you're responding as if I said it should disappear entirely.
> In my opinion, your arguments are coming from an emotional place. Try and examine futures markets from a place where you aren’t thinking about greedy rich Wall Street guys, the amount of money they make is irrelevant to futures markets being useful tools for producers and consumers of commodities.
I don't have any an animus against speculators; please try to read more charitably. The rapid growth of the finance industry over the last two generations is a result of the policies we've enacted, and the position that it should be smaller is an argument for different policies. Similarly, "it seems like we are pouring [too much] of our resources and brainpower in to designing exotic new ways to bet on the corn harvest" is a complaint about the system that incentivizes that outcome and the policies that produced it, not about the individuals acting within that system.
> I’m not sure what you’re trying to imply...
I wasn't suggesting that commodities are similar to housing in any way; I was saying that, since a lot of people seem to recognize the societal cost of speculation on housing specifically, that I was surprised to be downvoted for complaining about the cost of speculation more generally (which, I remind you again, is not the same as saying it shouldn't exist, only that our economy ought ideally to produce less of it).
