One of my favorite anecdotes that exemplifies unintended consequences is one call “Bootleggers and Baptists”. Wikipedia has a decent explanation.

If you want to skip the link and get the summary it goes something like this:

It isn’t often that you find bootleggers and baptists on the same side of the fence. Consider moral laws that prevent merchants from selling booze on Sunday. Now a baptist would wish alcohol not be sold at all, and especially on the day God rests. Afterall, would you really want drunks out on the road while all of the fine church-going folk are spending time with their families?

The problem that most people miss is that the bootleggers are more than happy to sell alcohol when the churchgoers are busy praying and singing. They could charge a markup specifically because the law does not permit alcohol sales on Sundays.

If you’re not too slow, you might see the bit of the paradox arising. If someone were to challenge the law because it is absurd on its face, you end up with the bootleggers and the baptists on the same side of the voting booth. Bootleggers would end up with very little money and the baptists would lose out on forcing their moral superiority on anyone who doesn’t agree.

A bootlegger therefore has to do very little if the baptists pursue keeping alcohol sales illegal on Sunday. In fact, they will throw as much support behind the baptists as possible if they were smart.

Whodathunkit.

LA Times runs an article where David Axelrod, an Obama advisor states:

Appearing on NBC’s “Meet the Press,” David Axelrod, a senior advisor to Obama, said, “We have to act. Every economist from left to right agrees that we have to do something big in terms of job creation, but we want to do it in a way that will leave a lasting footprint.”

I bet I can think of at least two economists who disagree with Axelrod’s assumption. And there are a host of other economists who disagree, whether they view the Austrian tradition in a positive/negative light.

The problem here is that our new administration is posturing this as a Global Warming-type “scientific consensus” issue that has already been used and beat into the ground. I’m sure Axelrod will start backpedaling and trying to reign in the comment with something to the effect of “the best economists” or the “brightest economists” to properly qualify the statement. Unfortunately, those definitions would be at the sole discretion of Axelrod and only as qualified as Axelrod is to determine who is the best and brightest.

The problem is that we don’t turn to scientific study to determine what the future is. We infer from the data that we have in an attempt to predict, with some reasonable probability, of future events.  There is a significant difference.  Prediction carries the inherent possibility of chance - the product or outcome of the unexpected is a distinct probability.

With this in mind, an economist’s opinion is only that - the opinion of the scientist. To assume an economist can predict the future with any certainty, which Axelrod appears willing to assume through the “consensus” opinion, is nothing short of malarky. If you believe that an economist knows the future any better than a carnival fortune teller, you are sadly mistaken.

If anyone knows anything, it’s that Wall Street is the largest house of gambling in the United States. We don’t call it gambling but certain segments of the market are nothing but betting pools. Commodities (futures, options, derivatives) are pretty much nothing more than a place to wager bets and hedge bets you have already made. Oil is no different.

When we hear of so-called “speculators” coming in and manipulating prices, we often miss the point of what the market is and why it works the way it does. This is especially true of oil. When you hear of oil trading, you may picture large barrels of oil moving from port to port every day. Yet when we’re talking about futures, what you see are “bets” on where oil will be in price at a certain point in time in the future. These bets are always “matched”. For every person who expects oil to rise in price, there is a matched bet predicting a decline in price.

While it may be a gross over-simplification, the wisdom of such bets gives you a lot of information wrapped up into a numeric value. When prices rise, you typically expect a large sentiment of “negative” information in the marketplace. When prices fall, you typically have a balance of “good” information in the marketplace.

To illustrate this point, let’s quickly look at corn. With the heavy push towards cleaner fuels and the heavy support for ethanol subsidies, farmers had the incentive to plant more corn this year. This may seem like good news, but the subtle realities were immediately apparent to the market: While there is an expectation of more corn coming to market, the corn will need to meet the needs of both the food production market and the rapidly growing fuel market. This stress is reflected in the price of corn, which has shot up in price despite the probability of having more corn coming to market this year.

But what happens when farmers plant more corn than, say, soybeans? It means the farmer grows fewer soybeans. We’re already beginning to see these effects in the marketplace where other commodities have shot up in price because farmers are planting less of these other crops.

To someone who works in an exchange, they could probably care less about the physical corn or potatoes they are betting on. What they care about is the the information in the marketplace associated with the product being traded. The trader then carefully places a bet on which direction they expect the price to go based on as much information as they can gather about the underlying product. No one person can have all of the information at hand. These gaps are filled by others who and bet according to their information which may be similar, but not always the same as the next person.

The price of oil is not necessarily the real price of the product but reflects the sentiment of what price will be based on the information at hand. Recently USA Today and other media outlets reported that drivers in the United States are driving far fewer miles this year than prior years and the number is significant. If this is the case, and the supply of oil is constant, you would expect the price to fall. However, in this case you have several other factors involved: the Iraq war, difficulties with Iran, aging refineries and the slowing ability to expand refinery production, limitations on oil drilling, government policy and regulation, a retreat from the housing market and so on.

So when we hear what the price of oil will be in the future, it is based on the information in the marketplace today. Right now. This very minute!

When politicians push to put pressure on the market and lob accusations of impropriety into the marketplace, it essentially creates a scenario where your favorite politician is working under the assumption that he or she knows more about the collective interests of the marketplace than the collective marketplace knows about itself. But you have to think big; the collective information of the market is represented by millions of bets on which direction the market is going with millions of people and automated systems all responding to information accumulated. If you think a politician can fix the so-called problem of speculation, you are grossly uninformed.

Betting is one of the oldest forms of collective wisdom, oil or not. And complaining about a short losing streak is a surefire way to cause more problems in the marketplace when you invite politics into the game.