Dead Economists Part VIC

So we have a group of retired (Thank The Lord, they've gone!) socialist politicians insisting that this nasty Anglo-Saxon capitalism, red in tooth and claw, must be tamed in order that social Europe might slumber on undisturbed.

No doubt others will rip into their proposals in more detail: I'm interested here only in the point that if you're going to drag out the name of some dead economist then it would help if you'd actually read him, even, if I might be so bold as to insist upon this, understood him as well.

Here's the actual letter they've sent.

Adam Smith, the father of laissez faire economics, wrote also “The Theory of Moral Sentiments”

Indeed he did write two books, but to associate him with "laissez faire economics" is profoundly stupid. Not only is he not, in the modern sense, a proponent of such policies, the word itself (as Gavin Kennedy reminds us continually) was invented decades after his death. As, indeed, was capitalism. Anyone who had actually read either of his books would grasp this point. But there's worse to come:

The spectacular rises in energy and food prices compound the effects of the financial turmoil and are ominous for what lies ahead. Quite tellingly, hedge funds have been involved in driving up the price of basic staples. It is the citizens of the poorest countries that will be most affected. We risk unprecedented destitution, proliferation of failed states, migration and more armed conflicts.

They miss out, of course, the effects of their own baby, the European Union, on such food price rises with the imposition of the absurd bio-fuels requirement. They've also quite missed the fact that in order to drive up prices hedge funds would need to be hoarding: and as we can all see, food stocks are falling, not rising.

But this ignorance of the facts is compounded by the ignorance of what Adam Smith actually said on this subject. If you're going to invoke such a hallowed name, worth actually understanding what he said, no?

For Smith speculators added a valuable component to a market. If there are going to be shortages in the future (he used corn as an example) then obviously, the price will rise in the future. What speculators do is anticipate such a future rise and buy now to sell higher later. This has the effect of raising prices now, and this of course is a good thing.

For consumers get the message of those prices now and start to economise on consumption and/or substitute it now, rather than later when the granaries run empty. That economy now means that less is consumed now, thus reducing the impact of the shortage itself. The speculators, by acting entirely in their enlightened self interest, have passed on the message that the shortage is coming and in doing so, have ameliorated said shortage by inducing consumers to change their behaviour.

This is normally considered a good thing: so the correct reaction to hedge funds piling into a commodity market is "Good!".

Something which our retired (and thankfully so) socialists seem blissfully unaware of and thus they are the people we should keep as far away from our financial markets as possible.

Since they don't understand them they'll ruin them rather than regulate them.