Not in need of more speculation, but of more speculators:

Greek prime minister George Papandreou demands a crackdown on credit default swaps. It’s easy to see why politicians bring up wicked speculators whenever some economic hardship shows up. It’s an old game to put the blame on others to deflect it from yourself.

Middlemen have been successfully pilloried for millennia. Ancient Athenians, faced with rising prices, hauled grain merchants to court some 2400 years ago. Could it be that throughout history speculators have messed up markets, hoarding wheat in ancient Athens and trading dodgy derivatives on post-modern Greek debt?

Indeed, they can become a problem if there are only a few of them.

The word “speculator” sounds derogatory, but it has a neutral, technical meaning. In commodity futures exchanges – the oldest and best established derivatives markets –  a speculator is a trader who is neither a producer nor a user of the commodity in question. Commodity producers and consumers protect themselves against price fluctuations with futures contracts that specify delivery at a certain price and date.

By contrast, speculators trade the contracts as an activity in itself. They typically do not deliver or take delivery of the physical commodity. These specialized middlemen mediate between future buyers and sellers, playing an essential role in meeting the needs of both sides.

Futures markets work smoothly and effectively because there is a large number of so-called “speculators.” If there were only one speculator, he could exploit people who need to buy or sell wheat—as would a group of speculators who act together. But there are many; they compete with each other and can’t fix the price.

The problem with the grain market in ancient Athens was that there were relatively few merchants. Regulators had the disastrous notion that grain importers should combine and form a cartel to buy grain cheaply. That caused higher prices. “Rather than blaming the regulators for these actions, the Athenians prosecuted the grain merchants for hoarding.”

At the trial, the prosecutor thus described the evil speculative acts: “For just when you find yourselves worse off for [grain], these persons snap it up and refuse to sell it, in order to prevent our disputing the price: we are to be glad enough if we come away from them with a purchase made at any price, however high.”

Had there been a large number of independently acting merchants, Athenians could have shopped for the best price. But taxes, heavy regulations and threats like this trial – which may have resulted in the merchants being put to death – discouraged the grain trade.

Consider the current complaint about credit default swaps on Greek debt. The claim is  that a group of traders colluded to buy the instruments – a type of credit insurance – thereby pushing up the price of CDS and causing rates on Greek bonds to rise. The traders then sold off and pocketed the profit, leaving Greece with a heavier interest burden. That’s the allegation.

An early investigation found no sign of speculation on Greek debt.  But leave that aside. For traders to collude, there has to be a small number of them. If that is the case, then what’s needed is more traders in CDS. They will bet against each other and not have the power to manipulate prices.

Then again, politicians need scapegoats. They can’t very well say, we dug the economy into a hole by spending money like it’s free and that’s why we’re paying high interest on our bonds.

It’s all relative of course:

Mark Thoma recently linked to a Gavin Kennedy post that argued Adam Smith did not favor laissez-faire.  I don’t agree.  The evidence cited was a one page list of government interventions that Smith favored.  The US, by contrast, has enough government interventions to fill a New York City phone book, if not a small library.  And the US is regarded by the Europeans as “unbridled capitalism.”  Even Hong Kong intervenes in far more ways than Adam Smith contemplated.   Of course Smith was not an anarchist, he did favor some government intervention in the economy.  But relative to any real world economy, his policies views were extremely laissez-faire. 

I see this as a common cognitive bias.  The Gavin Kennedy list posted by Thoma certainly looks impressive, but when you think more deeply about the issue it is a trivial set of policies.   I’m reminded of what happens when I discuss Singapore, which usually ranks number two in the world in lists of economic freedom.  People will often respond by telling me about all the ways the Singapore government intervenes.  My response is “so what?”  They could intervene in a 1000 different ways and still be vastly more laissez-faire than the US government.  Laissez-faire is a relative concept, and always has been.  I’ve read The Wealth of Nations, and Adam Smith is clearly a pragmatic libertarian.

Why we need climate sceptics:

As everyone knows, Professor Phil Jones, the director of the climatic research unit at the University of East Anglia, has sent some unwise emails. In one he boasted of using statistical “tricks” to hide declines in global temperatures, in another he advocated the deletion of certain data, and in yet another he proposed a boycott of journals that published inconvenient papers. Consequently Professor Jones has had to step aside from his directorship while his conduct is investigated.

But much of the criticism directed against Jones is naïve. What do people suppose scientists are? Disinterested followers after truth?

The great myth about scientists is the one propagated by uncritical readers of Karl Popper’s 1934 book The Logic of Scientific Discovery. There Popper argued that scientific statements are only provisional and that science progresses by their falsification. Hence the statement “all swans are white” was once true for Europeans but it was nonetheless falsified when Captain Cook reached Australia, whose swans are of course black. Thus does knowledge advance.

But that does not necessarily mean that individual scientists appreciate their theories being disproved. Indeed, one characteristic of many great scientists is that – unlike ordinary researchers - they are brave enough to disregard inconvenient facts. Consider the age of the earth.

During the 19th century Sir Charles Lyell had, by his study of the rate of erosion of cliffs and the creation of sedimentary rocks, proposed the earth to be hundreds of millions of years old. Yet, as we know from volcanoes, the core of the earth is red hot. And when contemporary geologists calculated the rate of heat loss, they concluded that the earth could be only a few millions of years old. Had it been any older, its core would have cooled. Lyell had been falsified.

But Lyell’s followers simply ignored the falsification, and to widespread derision they continued to assume that the sedimentary rocks, and the fossils they contained, were hundreds of millions of years old. Then one day somebody somewhere discovered radioactivity, somebody else discovered the core of the earth to be radioactive, and somebody else discovered that radioactive reactions emit heat, and hey presto the discrepancy was resolved. The core of the earth generates heat, which is why it is still hot, and the earth is indeed very old.

Lyell had demonstrated that great scientists are not necessarily falsifiers. But they are verifiers. They conceive of theories and they seek to verify them – and it is for others to falsify them. Obviously scientists should never fabricate data but many researchers will ignore inconvenient results. Indeed, if individual scientists were not passionate verifiers, they would not be driven to do the difficult experiments that push the boundaries of knowledge. Individual scientists, in short, are advocates, not judges, and their reluctance to self-falsify was recognised as early as 1667 by Thomas Spratt in his History of the Royal Society:- “For whosoever has fix’d on his Cause, before he has experimented; can hardly avoid fitting his Experiment, and his Observations, to his own Cause, which he had before imagin’d; rather than the cause of the truth of the Experiment it self.”

But if falsification can be the death of great science, it can also be the death of bad science, and must thus be embraced. Which brings us back to Professor Phil Jones. His behaviour may have been only typical of verifying scientists but it becomes dangerous when it is harnessed in defence of a powerful status quo.

Carbon-driven global warming is now a dominant narrative yet, as Professor Jones’s emails reveal, the evidence in its favour is not impregnable. Thus one of the emails on his system worried that “we can’t account for the lack of warming at the moment, and it is a travesty that we can’t” while another admitted that “we can have a proper result – but only by including a load of garbage.” One of Jones’s email correspondents, moreover, was Professor Michael Mann of Pennsylvania State University who, famously (or infamously), re-drew the conventional ‘wobbly’ graphs for recent global temperatures to represent them as showing a ‘hockey stick’ effect of sudden contemporary warming. This redrawing has been widely criticised.

But if the scientific evidence is imperfect, our response should not be to slate Professor Jones, who is obviously an honest man who has been enslaved by a hypothesis that is failing to make the expected predictions, but rather to encourage sceptics in their counter-advocacy. Only thus will truth eventually out.

Scientists are advocates, and they will not necessarily broadcast contradictory findings, so it is for the rest of us to adjudicate between competing results, not to swoon when advocates advocate.

Popular capitalism. Basically still a sound idea:

Bryan Caplan:

I’ll admit that (the left) often (is) aware of the unholy alliance of business and government.  But it’s naive to conclude that their real beef is with cronyism, not the free market.  Strange as it seems, the hard left sees the unholy alliance of business and government as an argument for government.*  Marxist historian Gabriel Kolko wrote a whole book about crony capitalism, but his research certainly didn’t shake his faith in socialism.  As he bluntly explained:

As I made clear often and candidly to many so-called libertarians, I have been a socialist and against capitalism all my life, my works are attacks on that system, and I have no common area of sympathy with the quaint irrelevancy called "free market" economics.  There has never been such a system in historical reality, and if it ever comes into being you can count on me to favor its abolition.

Commercial mayonnaise is almost always made with vinegar and its acidity slows the growth of bacteria while increasing the sandwich’s deliciousness. Win/win!

Lenore Skenazy in Free-Range Kids (And stop worrying about the cholestorol).