Value & Capital, CHAPTER X, Section 4

This lengthy section explores the vulnerabilities to the various sources of disequilibrium (and hence inefficiency) that may exist in different types of economies.  The section notes at the outset that the classification of causes of disequilibrium "has a distinct bearing on the great dispute about the relative efficiency of different types of economic organization."

The text argues that "the third and fourth sources of waste" (namely, imperfect foresight as to wants and hedging behaviors in response to perceived risks) would "be found in every conceivable economic system, Capitalist or Socialist, Liberal or Authoritarian."

In contrast, it is argued, "the first and second sources" (namely inconsistent price expectations across individuals and inconsistency of planned supply and demand quantities) may appear to be "peculiar to a system of private enterprise."  Thus a completely centralized system could, in theory, dictate what future prices would be, and even determine the supply and demand quantities allowed.  But as the text notes, "a completely centralized system is a mere figment of the imagination;  every government delegates its authority to some extent."  As a consequence, some of these delegated actions "can get out of step" and bring about the kinds of inefficiencies described.

The text then goes into an extended discussion on the role of "forward trading" (i.e. trades for future deliveries, and, in fact, all long-term contracts) in bringing about the coordination of plans in a private enterprise economy.  This discussion begins by imagining a system of private enterprise in which there is no forward trading at all.  Instead, all transactions are made for immediate delivery, i.e. delivery "on the spot," (which may be the reason for the name for such a market: a "spot market").  In such a market, it is only in the most ideal, stationary conditions that people could be expected to guess each other's plans with any reasonable accuracy.  Hence in normal circumstances, if "conditions are at all disturbed, a spot economy must be expected to get out of equilibrium to a considerable extent."

At the other extreme, one could imagine an economy in which all transactions were handled by forward trading.  In this type of system, a "futures economy," inconsistent price expectations and inconsistent planned supply and demand quantities (i.e. the first two sources of disequilibrium) would be absent.  Still the possibility of disequilibrium from imperfect foresight about preferences or resources would be present.  As a result, one would expect a spot market to arise to handle mismatches between planned sales and planned purchases.

This discussion transitions into a discussion about hedging.  Noting that traders are aware of the various uncertainties associated with buying and selling in the future, the text argues that

[T]he ordinary business man only enters into a forward contract if by so doing he can 'hedge' -- that is to say, if the forward transaction lessens the riskiness of his position.  And this will only happen in those cases where he is somehow otherwise committed to making a sale or purchase at the date in question ... and if he has already done something which will make it difficult for him to alter his plan.  Now there are quite sufficient technical rigidities in the process of production to make it certain that a number of entrepreneurs will want to hedge their sales for this reason;  supplies in the near future are largely governed by decisions taken in the past, so that if these planned supplies can be covered by forward sales, risk is reduced.

The discussion argues further that we do not see an equivalent hedging effect on the demand side, i.e. with planned purchases.  Such hedging of planned purchases "is almost inevitably rarer" and "less insistent" because of "technical conditions" that give entrepreneurs more freedom in decisions about acquiring the inputs to production than their freedom regarding the completion of outputs.  The text goes on to argue that it is because of this asymmetry that "forward markets rarely consist entirely of hedgers."

Futures prices are therefore nearly always made partly by speculators, who seek a profit by buying futures when the futures price is below the spot price which they expect to rule on the corresponding date; their action tends to raise the futures price to a more reasonable level.  But it is the essence of speculation, as opposed to hedging, that the speculator puts himself into a more risky position as a result of his forward trading -- he need not have ventured into forward dealing at all, and would have been safer if he had not done so.

Similar effects of hedging apply in labor markets as well, where it is in the interest of a worker to "hedge" future sales of his labor by securing long-term employment.  On the other hand, it is typically not in an employer's interest to offer long-term contracts, except in special circumstances such as when an employee is difficult to replace.