Monday, September 06, 2010

Invention of the Day: Futures markets

The idea of forward trading -- buying now goods that are to be delivered later -- is said to have originated around 1620 when a Nagoya rice merchant named Chozaemon met a friend from Sendai, in the north of Japan, who was passing through Nagoya on a pilgrimage. The friend reported that the rice harvest in the north was going to be bad. Chozaemon promptly bought the future Nagoya-area rice harvest, paying the farmers 10 percent upfront and owing them the rest. After the harvest came in, he stored the rice for several months, selling it for a tidy profit once the north's poor harvest had driven prices up.

Reinventing the Bazaar: A Natural History of Markets, by John McMillan. 2002. p. 23.

Future markets work as long as people keep their promises, their commitment supported either by law or culture. No wonder, forward contracts were invented in Japan, a country where culture is built on mutual respect and commitment to one's word. Being and island nation, Japanese farmers and merchants had no place to run from public shame and economic ruin, caused by one's low business ethics. Most likely, in a not so distant future, Facebook, LinkedIn, Farmville, or some other transparent social environment, will provide a similar honor mechanism for markets of novel digital goods.

tags: market, information, invention, innovation, quote, economics, social, network

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