Some of the modern derivatives are just instruments for financial institutions to self-destroy and require the government to bail them out, as we have seen in the fiasco of 2007-2009.
The other instruments such as options are ways for investors to hedge, and to lock in a price in the future. Imagine if farmers cannot secure advance contracts to sell their harvest. Some countries do not even have fixed-rate mortgages, which are really a contract to lock in the interest rate, and the home owners have to pay a floating rate based on the market.
About short selling, Robert Shiller in his Irrational Exuberance book cites this as a way to temper stock bubbles. He says one reason the housing market developed into such a bubble in 2005-2006 was that there was no way to short houses and to restore balance to the market.
"Old age is the most unexpected of all things that can happen to a man" -- Leo Tolstoy