Futures Exchanges-->Do they add value?

[whitespiral]

What is the Austrian opinion on this issue? Do you believe that futures exchanges are a good way of smoothing out the uncertainty and unpredictability inherent in some markets? Is their existence owed to an embrace by industry participants or just because of speculators? Would the fundamental conditions that prompted the founding of these echanges still exist in an Austrian economy or are they a product of regulated economies?

[Stranger]

Of course they do, why else would people do them?

[whitespiral]

When I wrote “inherent in some markets”, I meant inherent in some industries. So the question is, if futures exchanges really deliver value to the industries they sit on top off, or more so for the speculators. (BTW, I’ve got no bias against either, I’m just trying to find out more about them).

[Grant]

Yes! Future exchanges are the means by which one person can buy security. Need the price of wheat to by $1 a pound in a year? Buy wheat options. At the same time, they create incentives to predict the future. Idea futures or prediction markets are the best way to arrive at a consensus to predict a future event.

In Human Action, Mises writes:

We may construct the image of an economy in which the conditions equired for the establishment of futures markets are realized for all kinds of goods and services. In such an imaginary construction the entrepreneurial [what Mises referred to as the function of risk-taking in the economy] function is fulIy separated from all other functions. There emerges a class of pure entrepreneurs. The prices determined on the futures markets direct the whole apparatus of production. The dealers in futures alone make profits and suffer losses. All other people are insured, as it were, against the possible adverse effects of the uncertainty of the future. They enjoy security in this regard. The heads of the various business units are employees, as it were, with a fixed income.