Cool idea for the day: drug futures

Governments like to keep track of illegal drug prices as a measure of effectiveness of the Drug War and to brag about the street value of seizures. These indices can also be used as the basis for a drug futures market.

Futures contracts on illegal drugs wouldn’t necessarily be illegal themselves. Futures don’t need to deliver the underlying commodity or security; they can be settled in cash as the difference between the agreed price and the underlying. Thus it is possible to trade drug prices speculatively (or to hedge) without the need to deliver or receive actual drugs.

This would be good for the usual reasons futures markets are good: hedging, liquidity, and price discovery. It would also provide some very interesting incentives for governments, drug users, and drug sellers.

 

11 thoughts on “Cool idea for the day: drug futures

  1. Would it work for the international slave market as well? What about the illegal trade in native animals? Can we use it for stolen cars?

    I’m not sure it would help much except perhaps to culturally legitimise some activities that we may not want to culturally legitamise. Perhaps if you flesh out the idea a little more with the pros and cons.

  2. Illegal (but not criminal) goods can easily become commodities because of their voluntary nature. Due to the volume of voluntary trade, drugs are much easier to gauge than rarer actual criminal goods. Native animals? Either you don’t care for property rights or you think government should rightfully own state forests as part of their duty to protect our rights??

    If prices could be determined on criminal goods and gambling or trading resulted, would there be additional victims if no actual goods transaction takes place? I dare say not. Actual crime, not theoretical ‘cultural legitimisation’, should be the concern of a libertarian. You don’t want to limit free speech just because criminal ideas like taxation and drug prohibition may result.

  3. Either you don’t care for property rights or you think government should rightfully own state forests

    Is that a question or a conclusion?

    For the record before anybody get confused:-

    1. I oppose criminalisation of drug use.
    2. I think state owned forestry should be privatised

  4. A recent conference came out in favour of decriminalising drugs, and California keeps trying to liberalise its’ own laws, except the Fed won’t let it.

  5. It was a faux-conclusion taken from what you said, posed as a question to allow for a response. Perhaps clearer: Why shouldn’t an illegal (but not criminal) trade in native animals be culturally legitimised, just as drugs should be?

  6. I don’t mind freeing up trade in native animals. When I spoke of an undesirable normalisation I was thinking more of slavery and also what the general objection might be to the trading of futures in illegal goods.

  7. It would be a lot of work to create a futures market for an illegal good. There would be very few people who would go to large effort to create a market for a good so reprehensible as slavery. The few people who might want to would face boycott and ostracism. It doesn’t follow that future trading in an illegal but voluntary good like drugs, which has many self-respecting consumers, dealers and sympathisers would open up Pandora’s box and make any manner of criminal goods trade-able.

    But I take your point about general objection. Current public opinion would likely make such a market unachievable. Not only because of public opposition to drugs, but also because of their opposition against anything illegal, regardless of criminality, which they believe to be one and the same.

  8. I didn’t want to deprive you of the pleasure.

    In answer to your question it would only work where there is a sufficiently liquid spot market. Slavery might be possible but the market is probably too small and fragmented to measure the spot price with any accuracy.

  9. George Soros has doneted $1million to legalise marijuana in california. Guess the illegals market might not be necessary!

  10. I dont really understand how this would work. As I understand the futures market, the requirement (or, realistically, the potential) for physical delivery is fundamental to price determination.

    The value of a futures contract to deliver 10,000 pounds of pork belly next month is determined by a function of the costs of 10,000 pounds of pork belly today plus some such premium for the time value. These values change over time partly due to changes in the underlying spot price of the commodity, partly due to decay in time value, and partly due to the regualtions that govern prices on a particular bourse.

    Without the mechanism for physical delivery to ‘regulate’ the market, it would all become rather academic, and, ultimately, a random walk. It would not matter what the street price of a drug is when there is no way whatsoever to reconcile this with the futures market. I dont see how such a market could operate in a normal way when the underlying commodities *technically* do not exist.

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