How Speculators Stablilize Gas Prices

As long ago as 1953, Milton Friedman argued that speculation normally helps to stabilize prices rather than destabilize them.

Mr. Friedman’s argument was applied to currency trading, but the same reasoning works here.  If speculative trading tends to push prices higher when they are already high and lower when they are already low, then traders must be buying high and selling low.

That would mean that traders have to lose money on average — which does not seem very likely.  To the contrary, speculative traders try to buy low and sell high, activities that by their nature tend to push prices up when they are too low and down when they are too high.

Since Mr. Friedman’s 1953 article several papers have been published, both supporting and attacking this argument.  But the general principle seems quite robust.

 

For the full commentary, see: 

Hal R. Varian.  "ECONOMIC SCENE; The Rapidly Changing Signs at the Gas Station Show Markets at Work."  The New York Times  (Thurs., August 24, 2006):  C3.

 

The Milton Friedman article that Varian refers to, is: 

Friedman, Milton. "The Case for Flexible Exchange Rates." In Friedman. Essays in Positive Economics. Chicago:  University of Chicago Press, 1953.

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