Quote from jasonc:
I recently started university and I am taking economics courses but everything we have been taught so far seems to not take into consideration the role of speculators. An example is when we are learning about supply and demand we are simply taught that with things such as oil OPEC simply could cut supply and then the public would bid up the price to adjust for the change in supply. What I am wondering is does economics ever consider the role speculators play in the market place? Also if economics doesn't take these things into consideration then couldn't that lead to conclusions about future prices that aren't actually that justified?
Thanks Jason
First of all I would be questioning any instructor that gives OPEC even enough credit for being able to manipulate the price of oil in the least. Current price activity in the oil markets is proving my point as we speak and most analysts versed in the crude markets agree that today OPEC has difficulties in controlling crude prices (much more political than economic). A more accurate depiction of supply and demand is that of a local market, auction house and monopolies.....but that really isn't your question anyways.....
The speculator is usually under estimated, under emphasized, and totally under appreciated by most economics professors and students. You are a clever student to be thinking about the influence of speculators upon the markets, politics and society at large.
Many here have alluded to the risk/reward ratio aspects associated with speculators. Of course this is probably the most telltale mark of the role of the speculator, but if you accept the study of economics as being as much a social science as a study of financial forces, then the speculator becomes even more powerful and important.
Of course its easy to say the greater the risk = the greater potential reward. But what impact does this really have upon the markets and finance overall. These days hedge funds are associated with mass speculation and great risk taking. I would also argue that while hedge funds are not new nor a recent vehicle for investment (hedge funds have been around for decades), rather their recent proliferation is really the point of interest.
While supply and demand are market forces, the speculator, some might argue, is essential for liquidity and greater wealth distribution. In the end one could also argue that many societies throughout the world and history have been propelled forward through its speculators. One could also make a point that the markets that contain the more speculators tend to be much more open, free in nature, more solvent and stable (evidence of stable governments and consistant monetary policies).
I think what is of much more interest is the study of market/financial cycles, speculators actions during these times and how their actions contribute to boom and bust.
